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A look at Reliance Industries’ (RIL) FY22 annual report provides some pertinent insights on the way the company’s character has transformed over the past 3-4 years. The fiscal saw record profitability and margins for RIL’s consolidated operations, with growing scale of the consumer businesses complemented by recovery in ‘oil to chemicals’ (OTC) margins as well. However, substantially higher capex across business segments has meant that return ratios have compressed sharply over the past 2 years – overall RoE increased just 28bps and RoCE dipped 57bps YoY, driven by massive capex of Rs1.4trn, in FY22. Material capex of Rs827bn in digital services and Rs298.7bn in retail were key reasons for the weakness in return ratios. Despite the inflow of Rs2.6trn over the past 2 years via the unlocking of value in RJio and retail, as well as the rights issue of Rs529bn, net cash declined by Rs135bn in FY21 and increased by only Rs178bn in FY22. FCF yield therefore remained muted at 0.5% in FY22. Reiterate ADD, with a revised SoTP based target price of Rs2,805/sh.

* Earnings mix transformation continues: The share of consumer businesses (retail + digital) in consolidated revenues/EBIT has grown from just 15/10% in FY18 to 26/42% in FY22. The change was driven by a material change in size and scale of the digital services and retail segments. Digital services revenue has grown 7.6x in 5 years and retail revenue 2.8x. EBIT for retail and digital services has grown 4.9x and 7.9xrespectively.

* Capex remains ahead of estimates: Post the completion of downstream expansion and mobility capex by FY21, there was optimism around material FCF generation from RIL over FY22-FY24E. However, the capex run-rate has remained well ahead of earlier estimates of Rs500bn-600bn over FY21-FY22, averaging more than Rs1trn and touching an all-time high of Rs1.45trn for FY22. The capex includes a sizeable Rs48.7bn interest capitalised for the year vs Rs45.9bn capitalised in FY21.

* Gross borrowings jump 13% YoY: Despite the stronger profitability and inflow from the strategic sales / rights issue over FY21-FY22, gross long-term debt has risen by Rs414bn YoY to Rs3.6trn. This includes deferred payment liabilities rising by Rs183bn for the year. Net interest costs however declined, thanks to a refinancing of US$9bn of debt during the year, which has reduced the effective cost of debt. Overall foreign debt remained at 39% of overall debt, same as in FY21.

* Investments have jumped across businesses: RIL has continued to aggressively invest across new business segments, with a Rs28.1bn investment in Sterling & Wilson Renewable Energy and Rs55.5bn in Reliance New Energy. Real estate and project management too saw big jumps, with Rs100bn invested in convertible preferential shares of RIL 4IR Realty and Rs200bn in fresh convertible preferential shares of Reliance Projects and Property Management Services.

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