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Posts record profits, but record capex as well!

Reliance Industries (RIL) has reported yet another record year of profit growth in FY23, with Q4FY23 cons EBITDA/PAT of Rs384/193bn growing by 23/19% YoY and FY23 EBITDA/PAT of Rs1.4trn/Rs667bn growing by 29/14% YoY, respectively. Strong OTC segment earnings, coupled with a sharp turnaround in the upstream segment and sustained strength of the retail segment drove the improvement. OTC segment saw recovery in key product spreads and some improvement in petchem margins in Q4FY23, even as petchem margins overall have declined sharply in FY23 (polymer deltas down 15-32% YoY, polyester deltas down 9% YoY). OTC improvement was offset a bit by Rs66.5bn (~US$1.7/bbl) impact of the windfall taxes in FY23. Upstream segment had a big year, with 2.4x YoY jump in segment EBITDA in Q4 and 2.5x YoY jump for full year. However, we note the massive front loading of capex across segments, with capex of Rs1.4trn for the year at an all-time high. FY24-25E EPS prospects remain strong, with sustained improvement across OTC, upstream and retail segments to drive growth. Return ratios and FCF remain subdued, and therefore, we have revised down earnings to factor in higher depreciation/interest costs and marginally lower OTC metrics. Reiterate ADD.

* Despite OTC strength, consumer business remains the largest sub-segment: Share of OTC segment improved to 42.4% of consolidated EBITDA in Q4, up 290bps QoQ. Having said that, share of consumer businesses (at 47.6%) remains the key driver of operations. Upstream has been the real star of the show in FY23, with its share in EBITDA doubling to 9.1% from 4.6% in FY22.

* OTC margins improve for refining; petchem remains weak: Benchmark SG GRMs improved US$2.4/bbl QoQ to US$8.3/bbl, with a sharp improvement in gasoline spreads offsetting a decline in diesel/ATF spreads QoQ. Additionally, integrated margins in polymer and polyester spreads have also improved QoQ, which boosted segment profitability. Q1FY24E trends are, however, muted due to global demand concerns and we have revised our OTC assumptions downwards to factor in the expected H1FY24E weakness in global margins.

* Strong momentum from upstream and retail: Production from new fields stood at 19mmscmd for the year. Guidance of reaching 30mmscmd by FY24-end has been maintained. With price realisation likely to remain at >US$11/mmbtu, segment earnings may keep growing strongly over the next 2 years. Retail segment is the other driver – crossing 65mn-sqft and 18k stores in Q4FY23.

* Risk-reward seems balanced; maintain ADD: EBITDA and EPS CAGR of 14.2% and 19.8% over FY23-FY25E remain peer-leading and the stock has underperformed Sensex by ~18% in the past 12 months. We, however, continue to believe there is limited upside hereon due to i) stronger capex momentum, which would further push back FCF generation and dampen return ratios; ii) already strong multiples factored into the CMP; and iii) limited signs of return of capital to shareholders. Reiterate ADD with SOTPbased target price of Rs2,650/sh, implying ~13% upside.

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