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Standalone business delivers with improved realizations

* Reliance Industries (RIL)’s 3QFY23 consolidated revenue was in line with our estimate, up 17% YoY/down 6% QoQ. EBITDA grew 19% YoY/13% QoQ (18% beat) driven by a big beat in Standalone result. Adjusted for an extraordinary gain in 3QFY22, PAT declined 3% YoY as the improvement in operating margin was offset by higher depreciation and finance cost.

* RJio’s revenue/EBITDA rose 2%/5% sequentially (in-line) led by 1% increase in subscribers and marginal rise in ARPU. Controlled network cost and SUC benefit resulted in 120bp sequential EBITDA margin expansion to 52.2%. PAT grew 3% sequentially (5% miss) because of high depreciation charges due to 5G deployment in 3QFY23.

* Reliance Retail saw healthy revenue/EBITDA growth of 19%/25% YoY (slight miss) with improving footfalls and growing digital business; however, fashion and lifestyle segment remained soft during the quarter.

* O2C EBITDA came in 38% above our estimate at INR150b (+8% YoY); EBITDA/mt stood at ~USD113 (+7% YoY, +21% QoQ). Revenue growth was constrained as throughput was lower because of a planned maintenance and inspection activity turnaround. Production meant for sale stood at 16.2mmt in 3QFY23 (-8% YoY, flat QoQ).

* We have rolled over our SOTP valuation base to Dec’24. We value the Refining and Petrochemical segment at an EV/EBITDA of 7.5x, arriving at a valuation of INR879/share for the Standalone business. We ascribe an equity valuation of INR809/share to RJio and INR1,270/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 35x for Retail and 15x for Digital Services underscore new growth opportunities in the Digital space and steady market share gains. We reiterate our BUY rating on the stock with an SoTP-based TP of INR2,800.

RJio – growth softens with higher churn; PAT misses by 5%

* RJio’s revenue/EBITDA grew 2%/5% QoQ (in line), led by 1% subscriber adds and marginal improvement in ARPU. Net additions slowed down to 5.3m v/s 7.7m in 2QFY23 due to increased churn of 2.2% (v/s 1.8% in 2QFY23). The benefits from reduction in SUC charges and controlled network cost aided EBITDA growth but were offset by 5G-led depreciation charges leading to PAT growth of only 3% QoQ (5% miss).

* The company is aggressively rolling out 5G with a target to cover pan-India by Dec’23. We expect revenue/EBITDA CAGR to soften to 12%/17% over FY23-25 due to slower subs /ARPU CAGR of 6%/5%, respectively.

* Going forward, accelerated market share gains from VIL, tariff hikes, Jiofibre subscriber growth and other digital avenues triggered by 5G rollout could be the key positive catalysts.

Reliance Retail – record footfalls but discretionary demand remains soft

* Reliance Retail posted healthy performance with revenue/EBITDA growing 19%/ 25% YoY (in-line) and margin improving 40bp YoY. Core revenue/EBITDA (excluding Connectivity) grew 16%/34% YoY according to our calculations.

* Footfalls at 201m in 3QFY23 were the highest ever but the discretionary category performance was soft. Digital and new commerce grew 38% YoY, contributing 18% of revenue.

* It opened 789/608 gross/net stores during the quarter, taking the total store count to 17,725. Grocery/consumer electronics (excluding devices) jumped 65%/45% YoY, respectively, but fashion & lifestyle growth was soft at 13% YoY.

* Standalone revenue/EBITDA are expected to report 26%/32% CAGR over FY23- 25 propelled by accelerated store additions across segments, recovery in store productivity and aggressive foray into digital & new commerce domain.

O2C – performance supported by strength in middle distillate cracks

* Revenue stood at INR1,260b (in line; +13% YoY, -8% QoQ) in 3QFY23; consensus estimate was at INR1,288b.

* Revenue growth was constrained as throughput was lower because of a planned maintenance and inspection activity turnaround

* EBITDA was at INR150b (est. of INR109b; +8% YoY, +25% QoQ) in 3QFY23 due to better than expected benefit of advantaged feedstock and realization on middle distillates; consensus estimate stood at INR145b.

* SAED of INR19b was imposed on export of transportation fuels in 3QFY23.

* EBITDA/mt stood at USD112.9 (+7% YoY, +21% QoQ) with production meant for sale being at 16.2mmt (-8% YoY, flat QoQ).

* Reported PAT stood at INR84b (est. of INR67b, -18% YoY, +21% QoQ); consensus estimate was at INR96b.

* Gas price realization for KG-D6 improved to USD11.3/mmBtu in 3QFY23 from USD6.1/mmBtu in 3QFY22.

* Oil & Gas exploration EBITDA jumped ~2x YoY to INR39b

* Key macro performance highlights:

* Global refinery throughput was higher by 1mb/d YoY at 81.4mb/d in 3QFY23.

* Crude oil benchmarks rose YoY due to aggressive production cuts announced by OPEC+, limited spare capacity, EU sanctions and G7 price cap on Russian oil exports.

* For 9MFY23, revenue stood at INR4,111b (+40% YoY), EBITDA was at INR490b (+30% YoY), and PAT stood at INR304b (+9% YoY).

Valuation and view

* Consolidated gross debt increased to INR3,035b at end-3QFY23 (v/s INR2,949b at end-2QFY23), with cash & cash equivalents of INR1,933b. Net debt stood at INR1,102b (as per the company).

* Segment wise, the consumer business has seen soft growth in both retail and telecom as retail was hit by soft discretionary spends and telecom business has seen high churn and limited ARPU levers. Further, 5G investment should intensify with the target to achieve pan-India rollout by Dec’23. The Oil and Gas segment has seen tailwinds with better margin as well as higher and sustained production coupled with opening up of China that could sustain earnings.

* We value Reliance Retail’s core business at 35x EV/EBITDA and assign 2x multiple to Connectivity on Dec’24E basis, arriving at our valuation of INR1,270 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the opportunity for rapid expansion in the Retail business and the aggressive rollout of digital ventures, including the JioMart platform.

* RJio should see the benefit of tariff hikes accrue in the coming few quarters as we see healthy ARPU improvement. Further, as RJio’s growth slows, Jio Platforms Ltd (its holding company) is keen to replicate the success of Wireless in other business streams with aggressive plans and product launches in place.

* Thus, we assign an EV/EBITDA multiple of 15x on Dec’24E basis, arriving at our valuation of INR809/share (for its 66% stake). The higher multiple captures the revenue opportunity in Digital, potential tariff hikes, and steady market share gains.

* As per IEA, global oil demand is estimated to grow 1.9 mb/d in 2023 – led by the US, China and India. Relaxations in China with respect to COVID would see demand improving with cracks likely to remain elevated on lower inventories, seasonal demand and impending loss of Russian supply. RIL, however, believes that higher Chinese export quotas could bring supplies in the region despite expected higher Chinese domestic demand.

* There is positive momentum in the domestic demand for both polymers and polyesters and their demand is projected to track economic growth. Margins for both are also likely to improve as demand from China, EU and the US picks up.

* The GoI has already raised the gas price ceiling to USD12.5/mmBtu for 2HFY23. The Kirit Parikh committee has submitted its report on natural gas pricing, recommending removal of the ceiling price for HPHT gas from Jan’26. LNG imports have been lower in India due to higher domestic gas availability and high prices. RIL believes that there is uncertainty on the EU restocking and that demand from China is going to keep the market volatile, thus maintaining gas price realization high in the near term.

* Factoring in the aforementioned, we estimate an EBITDA of USD117/mt for FY23 (vis-à-vis USD125/mt in 9MFY23). We model a capex of INR350b per year in the standalone business, considering RIL’s investments in the new-age greener businesses (such as solar energy and a hydrogen ecosystem in India).

* We revise our capex estimates for FY23/FY24 to INR1,700b/INR1,000b from INR1,650b/INR750b respectively, building in INR1,262b/INR280b in Telecom, INR350b/INR350b in the Standalone business and the rest in others.

* Using SOTP, we value the Refining and Petrochemical segment at 7.5x on Dec’24E EV/EBITDA to arrive at our valuation of INR879/share for the Standalone business. We ascribe an equity valuation of INR809/share to RJio and INR1,270/share to Reliance Retail, factoring in the recent stake sale. We reiterate our BUY rating on the stock with an SoTP-based TP of INR2,800.

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