IGI Logo

Healthy all-round performance

* Reliance Industries (RIL)’s 3QFY22 consolidated revenue/EBITDA was up 57%/38% YoY (in-line), and standalone EBITDA grew 60%. RJio’s EBITDA was in-line (up 17% YoY, 6% QoQ), while Retail EBITDA recovered by 24% YoY (inline).

* RJio’s revenue/EBITDA growth was aided by the partial benefit of tariff hikes, which were up 3%/6% QoQ (in-line), and drove ARPUs higher by 6%. This was partly offset by a second consecutive quarter of net subscriber decline of 8.5m. The EBITDA margin improved 120bp sequentially to 49.2%.

* Reliance Retail’s net revenues were up 53% YoY (4% beat) and 25% above pre-COVID levels, driving 24% YoY EBITDA growth (40% above pre-COVID levels); this was led by aggressive footprint addition.

* O2C EBITDA came in 7% below estimate at INR139b (+60% YoY). EBITDA/mt stood at ~USD106 (+45% YoY, +6% QoQ) led by better refining and petrochemical margins. Production meant for sale stood at 17.6 mmt, in line.

* RIL received INR265b towards the second and final tranche out of the INR530b rights issue. It raised USD4b via foreign currency bond and refinanced high-cost deferred spectrum debt of INR308b, saving INR12b in interest cost annually.

* Using SOTP, we value the Refining and Petrochemical segment at FY24E EV/EBITDA of 7.5x, arriving at a valuation of INR742/share for standalone. We ascribe an equity valuation of INR890/share to RJio and INR1,100/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 35x for Retail and 17x for Digital Services underscore new growth opportunities in the Digital space and steady market share gains. Reiterate Buy, with Target Price of INR2,800/share.

3QFY22 snapshot – EBITDA in-line; adj PAT beat on lower finance cost

* RIL’s revenue/EBITDA increased 57%/38% YoY (20%/11% QoQ) to INR1850.3b/INR297.1b (in-line). PBT before exceptional item grew 48% YoY to INR223b, aided by strong revenue growth. Adjusted for INR28.4b exceptional gains towards divestment of shale gas asset, PAT grew 23% YoY (6% above estimate), aided by lower than expected finance cost.

RJio – tariff hikes to drive growth

* RJio reported revenue/EBITDA growth of 3%/6% QoQ (in-line), led by strong 6% ARPU growth and a second consecutive quarter of 2% subscriber decline (8.5m). The EBITDA margin improved 120bps to 49.2%.

* RJio’s 9MFY22 revenue/EBITDA grew 7%/20% YoY to INR560.7b/INR271.2b. PAT grew 22% over this period to INR106.4b.

* We expect revenue growth of 20%/9% and EBITDA growth of 25%/16% over FY23E/FY24E on the back of a 7%/5% ARPU/subs CAGR over FY21–24E, along with RJio’s new growth avenues in the Home and 5G space (building capabilities in new-age services). The recent JioPhone Next launch met with lukewarm response.

Reliance Retail – strong revenue recovery; margin beats our estimate

* Reliance Retail’s net revenues/EBITDA posted YoY growth of 53%/24% (in-line), reaching 40% above pre-COVID EBITDA (3QFY20). This was led by strong 27%/52% growth in store/footprint v/s pre-COVID.

* Store operations normalized, with footfall at 95% of pre-COVID levels, although the new COVID strain and subsequent localized restrictions have softened the business.

* Core revenues (excluding the Connectivity biz) grew 90% YoY, 49% QoQ, and remained 25% above pre-COVID levels.

* In 9MFY22, the company’s revenue/EBITDA grew 27%/40% YoY to INR1,241b/INR86.7b despite the impact of localized lockdowns in 1HFY22.

O2C EBITDA – miss of 7%

* Revenue stood at INR1,112b (in line with est., +81% YoY), amid higher volumes in the O2C seg. EBITDA came in 7% below estimate at INR139b (+60% YoY). EBITDA/mt stood at USD105.5 (+45% YoY, +6% QoQ), with production meant for sale in line with the estimate of 17.6mmt. Reported PAT stood at INR101.7b (in line with est., +18% YoY). The tax rate was lower at 18.3% owing to tax benefits.

* In 9MFY22, EBITDA was up 61% YoY to INR377b (translating to EBITDA/mt of USD100 v/s ~USD67 in 9MFY21). Adj. PAT stood at INR280b (+42% YoY).

* Key macro performance highlights are as follows:

* Demand for polymer and polyester was subdued during 3QFY22, due to high prices and an extended monsoon season.

* Oil demand was up 1.1mnbopd QoQ, led by robust consumption and increasing international travel – as more countries re-opened their borders.

Valuation and view

* Consolidated gross debt remains largely flat at INR2,447b at end-3QFY22 (v/s INR2,559b and INR2,518b at end-2QFY22/FY21), with cash & cash equivalents at INR2,418b – with net debt at INR28.6b (as per the company).

* RJio should see the benefit of tariff hikes accrue in the coming few quarters as we see healthy ARPU improvement. Furthermore, as RJio’s growth slows, Jio Platforms Ltd (its holding company) is keen to replicate the success of Wireless in other business streams, with aggressive plans and product launches in place.

* Thus, we assign an EV/EBITDA multiple of 17x on Mar’24E EBITDA, arriving at TP of INR890/share (for its 66% stake). The higher multiple captures the revenue opportunity in Digital, potential tariff hikes, and steady market share gains.

* We value Reliance Retail’s core business at 35x EV/EBITDA and assign 4x to Connectivity, arriving at TP of INR1,100 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the opportunity for rapid expansion in the Retail business and the aggressive rollout of digital ventures, including the JioMart platform.

* Declining infection rates would further result in the easing of movement restrictions, supporting demand for middle distillates. SG GRM further improved to an average of USD6.1/bbl in 3QFY22, as demand continues to outweigh supply.

* RIL believes that a much colder winter, the prolongation of Europe’s gas crisis, and the lowering of fuel export quotas in China should support demand and cracks of middle distillates. Although, the outbreak of the newer variant of the virus, coupled with higher crude prices, could defer economic recovery by a quarter and may impact feedstock prices and downstream margins.GoI has already raised the gas price ceiling to USD6.13/mmBtu for 2HFY22. Considering the current high gas price environment, the company believes the subsequent revision in the ceiling would be even higher. Thus, sustained high production and improved realization would result in better profitability in the segment in the near future.

* Factoring in the aforementioned, we estimate EBITDA of USD102/mt, USD120/mt, and USD117/mt for FY22, FY23E, and FY24E, respectively (vis-à-vis USD97/mt and USD70/mt in 1HFY22 and FY21, respectively).

* We build in a capex of INR350b per year in the standalone business, considering RIL’s investment in new-age greener businesses (such as solar energy and a hydrogen ecosystem in India).

* Using SOTP, we value the Refining and Petrochemical segment at 7.5x FY24E EV/EBITDA to arrive at a valuation of INR742/share for standalone. We ascribe an equity valuation of INR890/share to RJio and INR1,100/share to Reliance Retail. Reiterate Buy, with Target Price of INR2,800/share.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer