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FY23 Annual Report – broad-based earnings strength; FCF remains negative

The FY23 annual report of Reliance Industries (RIL) throws up some interesting data points: i) Capex of INR 1.4trn had grown by a material INR 423bn in FY23, ii) resultant, net debt (including spectrum and other deferred payment liabilities) expanded sharply to INR 1.05trn, despite a material INR 428bn of increase in cash + equivalents for the year, iii) net working capital (excluding cash) increased by INR 220bn, driven by a sharp uptick in inventories, iv) FCF generation remains elusive, despite sharply higher profitability – FCF yield of negative 1.2% vs an average negative yield of 3.6% over FY21-22. Overall, earnings prospects remain strong for RIL, but we have revised down FY24/25E EPS by 2% each, TP reduced by 1% to INR 2,650/sh (from INR 2,670/sh). Maintain ADD rating.

Broad-based earnings growth

RIL has continued its quest to create a diverse well-rounded portfolio of earnings growth over the last 5 years and this year has seen further strengthening of the same. EBITDA contribution from the erstwhile mainstay oil to chemicals (OTC) segment reduced by 2,958bps over FY19-23 to 41% while share of retail and JIO had expanded (aggregate) by 2,158bps over the period to 45% as of end FY23.

Capex intensity remains material

Capex of INR 423bn in FY23 had grown materially over (restated) capex of INR 995bn seen in FY22, with retail and JIO segments expectedly consuming the bulk of the capex. The rise in retail segment is particularly striking, with capex of INR 514bn in FY23, ~10x the capex in this segment seen in FY18! JIO/digital services capex of INR 585bn was also the second highest seen in the last 6 years. We also note that revenue run rate for some of these segments has not kept pace, with retail net revenue growing 3.7x (capex run rate up 10x) from FY18-23.

Free cashflow (FCF) improvement remains tepid

Despite a near 18% CAGR in operating earnings over FY20-23, FCF earned during this period has remained muted – aggregate FCF earned during FY20- 23 is negative INR 760bn, with small positive FCF earned in FY20 and FY22 offset by a sharply negative FCF of ~INR 1trn seen cumulatively in FY21 and FY23.

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