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O2C and Telecom deliver; Retail is recovering gradually

* EBITDA for the consolidated/standalone business rose 38%/61% YoY in 1QFY22 on a low base of last year (2% beat). On a QoQ basis, consolidated revenue/EBITDA is up -6%/1%. RJio’s EBITDA was in line (up 23% YoY), while the same for Retail grew 79% YoY (6% beat) on a low base.

* Despite the impact of the second COVID wave, RJio held its ground after the push from the Jio Phone launch in 4QFY21. Revenue/EBITDA grew 4% QoQ (in line) on a steady 14.4m net subscriber additions, along with flattish ARPU. EBITDA margin expanded 10bp QoQ to 47.9%.

* Reliance Retail’s revenue/EBITDA grew 19%/79% YoY (6% EBITDA beat) as the second COVID wave had a lesser impact v/s that in 1QFY21, cushioned by the e-commerce business, swift recovery, and lesser intensity of the lockdown. Compared to pre-COVID levels (1QFY20), EBITDA was flat.

* The company reported an O2C EBITDA that was 6% higher than our estimate at INR114.6b (+61% YoY, +12% QoQ). Production meant for sale stood at 16.5mmt (+10% est., +4% YoY) – translating to an EBITDA/mt of USD94.4 in 1QFY22 (-3% est., +59% YoY, +12% QoQ).

* Using SoTP, we value the O2C business at 7.5x FY23E EV/EBITDA, arriving at a valuation of INR776/share for the standalone business, and assign INR68 for its E&P assets. We ascribe an equity valuation of: a) INR875/share to RJio at 20x FY23E EV/EBITDA and b) INR771/share to Reliance Retail at 34x FY23E EV/EBITDA, factoring in the recent stake sale. We reiterate our Buy rating with a TP of INR2,485/share.

1QFY22 snapshot: Consolidated EBITDA in line; standalone witnesses a 6% beat

RIL’s revenue/EBITDA increased by 59%/38% YoY to INR1,399b/INR234b (-6%/1% QoQ). Finance cost declined by 50% YoY and 24% QoQ to INR34b. PBT before exceptional items grew by ~110% YoY to INR173b. Reported PAT declined 7% YoY to INR123b. Adjusted for exceptional items, it grew by 47% YoY (19% beat in estimates).

RJio – Jio Phone Next, digital avenues to sustain high growth

* Despite the restricted operation due to the second COVID wave, RJio was able to garner a healthy gross/net subscriber addition rate of 26.7m/14.4m, thus driving revenue/EBITDA growth of 4% QoQ (in line), even as ARPU remained flat at INR138. EBITDA margin improved by 10bp.

* It aims to target the 300m feature phone addressable subscriber base. It is now building capabilities in new age technologies like 5G, JioFiber, enterprise solutions for SMEs, and other digital avenues, which should hold it in good stead.

* We expect revenue growth of 10.3%/15.6% and EBITDA growth of 22%/16% over FY22E/FY23E on the back of subscriber growth at 13% CAGR over FY21-23E, assuming a higher monthly net subscriber addition rate of 7.1m in FY22, more than double of the 3.2m recorded in FY21, on the back of a big device launch – Jio Phone Next.

Reliance Retail – cushioned by the online business and lesser constraints in its operating

* Given lesser constraints in its operating environment relative to 1QFY21, despite the lockdown, revenue/EBITDA rose by 19%/79% YoY.

* Revenue touched pre-COVID levels of 1QFY20. The strong EBITDA jump was due to investment income of INR5.5b, with a 30bp margin improvement.

* The company opened 123 new stores, with ~700 stores ready for fit out, while online revenue rose to 20% from 4% last year, indicating over 8x growth with its recent online foray.

* Core revenue is estimated to decline 6% YoY (after excluding the Connectivity business). Core EBITDA (excluding Connectivity and investment income) has grown 48%, with a 50bp margin improvement, as per our workings

O2C – robust operating performance, coupled with margin expansion

* Production meant for sale stood at 16.5mmt (+10% est., +4% YoY).

* EBITDA/mt stood at USD94.4 (-3% est., +59% YoY, +12% QoQ).

* EBITDA came in 6% higher than our estimate at INR114.6b (+61% YoY, +12% QoQ).

* Higher other income and lower interest cost led to higher than estimated PBT at INR101.9b. PAT stood at INR86b, with the tax rate at 15.6% (normalized rate for the year for the company).

* Operating efficiencies during 1QFY22 was on the back of:

* Energy cost optimization, with an increase in domestic gas.  Optimized light feed cracking on favorable economies.

* Swiftly flexed its business model from domestic to export, ensuring full utilization.

Valuation and view

* Consolidated gross debt remains flat at INR2,539b at the end of 1QFY22 (v/s INR2,518b at the end of FY21), with cash and equivalents at INR2,577b, translating to a net cash of INR39b (as per the company).

* RIL has undertaken a capex of INR460b in 1QFY22 (with INR293b incurred towards acquiring spectrum by RJIL).

* RJio’s subscriber-led growth focus continues. We have factored in a higher net subscriber addition rate of 7.1m, more than double that of the 3.2m recorded in FY21, on the back of big device launch – Jio Phone Next – in the low cost feature phone market. This, along with the digital opportunities, should drive valuations.

* We assign a rich 20x FY23E EV/EBITDA, maintaining our TP at INR875/share. The higher multiple captures: a) its market leadership, b) opportunity in the Digital and Fiber space, and c) expected gains from any potential tariff hikes.

* We value Reliance Retail on a SoTP basis, valuing its core business at 34x Mar’23E EV/EBITDA and petro-retail/connectivity at 4x Mar’23E EV/EBITDA to arrive at our TP of INR771. Our premium valuation multiples capture the opportunity for rapid expansion in its Retail business and the aggressive rollout of the JioMart platform.

* Increased vaccination coverage and containment of COVID-19 cases across the globe (especially in populated emerging economies) will drive business confidence and boost demand further. Continued recovery in road and air mobility will lift demand for transportation fuel in coming quarters.

* RIL believes that new capacity additions in the global polyolefin space should be absorbed by strong demand in Asia. This would keep polyester margin firm in the near term, proving beneficial to integrated players. Favorable policy initiatives to boost PE and PVC pipe demand, along with robust demand growth expected from Healthcare, Food, FMCG, and Packaging players is likely to aid both demand growth and deltas.

* We build in an EBITDA of USD104/USD127/USD127 per mt for FY22E/FY23E/FY24E (v/s USD84/USD94 per mt reported in 4QFY21/1QFY22), on the back of improvement in refining margin, with further feedstock optimization (as discussed above).

* Gas production of over 18mmscmd is expected in FY22 (from already commissioned R-Cluster and Sat-Cluster), while the MJ field will be commissioned in 3QFY23. KG Basin is expected to achieve peak production of ~30mmscmd by CY23E. RIL expects gas price realization to improve from here on, with a likely 50-60% increase in the domestic gas price ceiling for 2HFY22.

* Using SoTP, we value the O2C business at 7.5x FY23E EV/EBITDA, arriving at a valuation of INR776/share for the standalone business, and assign INR68 for its E&P assets. We ascribe an equity valuation of: a) INR875/share to RJio at 20x FY23E EV/EBITDA and b) INR771/share to Reliance Retail at 34x FY23E EV/EBITDA, factoring in the recent stake sale. We reiterate our Buy rating with a TP of INR2,485/share.

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