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Weaker margins, govt. levies, weigh on earnings

Our view

RIL reported an in?line 2QFY23, with a consolidated operating profit of Rs 312.2bn (vs YES est. Rs 311bn) and PAT of Rs 155.1bn (YES est. Rs 155.7bn). While headline numbers were in?line, at segmental level, whereas O2C earnings missed our estimates (?4%), the earnings for Retail (+6%) and Digital services (+4%) stood better than estimated. Weaker refining and petrochemical margins, coupled with implementation of SAED (impact of Rs 40.3bn) and planned maintenance shutdown at SEZ refinery, impacted O2C profitability. The consumer facing businesses on the other hand improved QoQ & YoY on account of better consumer engagement and higher realization. Going ahead the consumer businesses are likely to maintain the earnings momentum moving into 3QFY23, backed by onset of festive and winter season. In the O2C segment as well, refining and petrochemical margins are expected to firm up on recovery in Chinese demand along with incremental sanction on Russian exports; however weaker global GDP growth remains a concern for petroleum consumption and margins. Maintain ADD with TP of Rs 2750/sh.

Result Highlights

* Revenue: The consolidated net?revenue stood at Rs 2300bn (+37% YoY; +5% QoQ), driven by a) stronger sales momentum in Retail and b) 7.7mn net subscriber addition along with QoQ & YoY higher ARPU, offset partially by 1% QoQ weaker O2C segment, which however was still higher by 33% YoY on higher crude prices.

* Operating Profits: Consol. Ebitda at Rs 312.2bn (+20% YoY; ?18% QoQ), dragged down by a) QoQ weaker refining and petrochemical margins and b) impact   of SAED (Rs 40.4bn) on refining margins

* Consolidated PAT: stood at Rs 155.1bn (flat YoY; ?20% QoQ), weighed down by higher depreciation due to higher telecom network utilization and higher gas production from KG basin. PAT was additionally impacted by higher finance costs due to higher loan balance in a rising interest rate environment.  

* O2C Segment Ebitda: at Rs 119.7bn (?6% YoY;  ?40% QoQ) on QoQ weaker refining and petrochemical margins coupled with impact of SAED (Rs 40.4bn).

* Oil & Gas Ebitda: stood at Rs 31.7bn (+254% YoY; +16% QoQ), growth aided by higher realization in KG Basin (USD 9.9/mmbtu) and CBM (USD 23.3/mmbtu) along steady KG basin production at 19mmscmd. The production is expected to look?up post commissioning of MJ field by end of CY22.  

* Digital Services Ebitda: at Rs 122.9bn (+29% YoY; +5% QoQ) as ARPU rose to 177.2 along with addition in subscriber base to 427.6mn.

* Retail Ebitda: at Rs 44.1bn (+51% YoY; +15% QoQ) on strong growth across consumption basket led by YoY doubling of revenue in Grocery segment.

* Finance Cost: At Rs 45.5bn stood higher by 19% YoY and 14% QoQ, due to increase in interest rates, along with higher loan balances.

* Net?Debt: The gross debt at the end of 2QFY23 stood at Rs 2948.6bn (1Q: Rs 2633.8bn) and cash & equivalents at Rs 2016.1bn (1Q: Rs 2057.3bn), implying a net?debt position of Rs 932.5bn (1Q: Rs 576.5bn).

* Capex: Capex for 2QFY23 stood at Rs 325.3bn (1Q: Rs 314.4bn).

Valuation

We value RIL at Rs 2750/sh, on SOTP basis, implying a target P/E multiple of 21.7x FY25e, as against 19.5x the stock is currently trading at.

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