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Digital and Retail in line; O2C not as strong as expected

RIL’s consolidated 1QFY23 EBITDA, at INR 380bn (up 21% QoQ), was 9% below JMFe of INR 418bn (though in line with consensus of INR 385bn) due to lower-than-expected jump in O2C segment EBITDA while the performance of the Digital and Retail segments was largely in line. Further, consolidated PAT (after minority interest) was INR 180bn, significantly below JMFe/consensus of INR 225bn/ INR 216bn) due to normalisation of the tax rate. O2C business EBITDA rose 40% QoQ to INR 199bn, but was 14% below JMFe on lower-than-expected jump in refining margin. Digital EBITDA went up 4.7% QoQ; 2% ahead of JMFe on higher APRU and lower network cost. We have cut our FY23/24 PAT by 4.3%/0.6% incorporating slightly lower GRM and normalised tax rate; we have revised our TP to INR 2,950 (from INR 3,000). We reiterate BUY given RIL’s industry leading capabilities across businesses and expectation of strong 16-18% EPS CAGR over the next 3-5 years.

* O2C business EBITDA up 40% QoQ at INR 199bn, but 14% below JMFe: O2C EBITDA was INR199bn (up 40% QoQ and up 63% YoY); however, this was 14% below JMFe of INR 232bn due to a) rise in official selling price for Middle East crude; b) losses on domestic fuel retailing business; c) high opex due to rise in energy and freight cost; d) lower volume due to shutdown of the DHDS unit in refining. However, it is difficult to specifically comment on the margin trend for the refining and petchem segments given limited details.

* Digital EBITDA up 4.7% QoQ; 2% ahead of JMFe on higher APRU and lower network cost: Jio standalone EBITDA was INR 110.5bn (up 4.7% QoQ and up 28% YoY); this was 2.2% higher than JMFe due to lower network cost, higher ARPU, and subs addition. EBITDA margin was 50.3% in 1QFY23 (vs. 50.4% in 4QFY22). Overall ARPU was slightly higher at INR 175.7 in 1QFY23 vs. JMFe of INR 174 (and INR 168 in 4QFY22) due to lagged impact of recent tariff hikes and strong FTTH momentum. Net subs addition was 9.7mn in 1QFY23 vs. JMFe of 4.5mn (this follows net loss of 10.8mn/8.5mn/11.1mn in 4QFY22/3QFY22/2QFY22). Data usage per subs rose to 20.8GB/month in 1QFY23 (vs. 19.7GB/month in 4QFY22).

* Retail business focus on store expansion; strengthens digital/omni-channel capabilities: Retail gross revenue was up 1% QoQ at INR 586 bn while EBITDA rose 3.6% QoQ to INR 38.5bn (but down 5% below JMFe). EBITDA margin rose 17bps QoQ to 6.6% in 1QFY23 (vs. 6.4% in 4QFY22). Digital and New Commerce grew >2x over the last year and contributed about 19% of gross revenue. A total of 15,866 physical stores are operational, with 792 stores opened during 1QFY23.

* Expect strong 16-18% EPS CAGR over the next 3-5 years – reiterate BUY: We have cut our FY23/24 PAT by 4.3%/0.6% factoring in normalisation of the tax rate to ~25%, moderation in GRM estimate to USD 11.5/bbl in FY23 (from USD 12.5/bbl) and USD 10.5/bbl in FY24 (from USD 11.0/bbl); this is, however, partly offset by weaker INR/USD exchange rate assumption. Hence, our TP has been cut to INR 2,950/share (from INR 3,000). We reiterate BUY given RIL’s industry leading capabilities across businesses and expectation of strong 16-18% EPS CAGR over the next 3-5 years — A Giant Digital Leap. At CMP, the stock is trading at FY24E P/E of 21.6x (3-year avg: 22.0x) and FY24E EV/EBITDA of 11.8x (3-year avg: 12.6x).

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