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O2C drives earnings beat; guides to keep net debt/EBITDA < 1

RIL’s consolidated 4QFY23 EBITDA was 4.4% above JMFe at INR 384bn (up 22.6% YoY and 9.1% QoQ) vs. JMFe/consensus of INR 368bn/INR 364bn due to 02C EBITDA at INR 163bn (up 17% QoQ) being 10% above JMFe on account of stronger-than-expected refining margin (higher crude sourcing advantage). The management expects refining margin to be supported on likely delay in new refining capacity addition and expectation of demand pickup in 2HCY23 due to full reopening of China; however, it expects petchem margin recovery to be constrained due to volatile feedstock price, supply overhang, and muted demand growth. Digital EBITDA at INR 134bn (up 3.8% QoQ) was in line with JMFe; ARPU at INR 179 was a tad lower while net subs addition of 6.4mn QoQ was slightly better. Retail business EBITDA at INR 49bn was 2% below JMFe; however was still up 2.9% QoQ and 33% YoY as strong store addition continues. RIL’s consolidated 4QFY23 capex was higher at INR 444bn, taking total FY23 capex to INR 1,418bn (vs. capex of INR 995bn in FY22). Reported net debt at end-4QFY23 was flattish QoQ at INR 1,102bn. In addition, deferred spectrum liability was at INR 1,128bn at end4QFY23. The management highlighted that net debt increase in FY23 was attributable to working capital change and forex translation impact. Further, it has guided to maintain net debt to EBITDA at below 1x (vs. reported net debt to EBITDA of ~0.7x at end-FY23). We reiterate BUY (unchanged TP of INR 2,900) given RIL’s industry leading capabilities across businesses and expectation of robust 13-14% EPS CAGR over the next 3-5 years.

* O2C business EBITDA at INR 163bn was 10% above JMFe due to stronger-than-expected refining margin: O2C EBITDA at INR 163bn (up 17% QoQ and 14% YoY) was 10% above JMFe – this could be mostly due to implied higher GRM at ~USD 13/bbl (vs. JMFe of USD 11/bbl) on account of crude sourcing advantages (with Russian crude constituting ~25-30% of crude requirements). The company highlighted adverse impact on EBITDA of INR7.1bn in 4QFY23 (or implying USD 0.6/bbl hit to GRM) due to SAED on export of transportation fuels with effect from 1st Jul’22; total FY23 impact was INR 66.5bn. The management expects refining margin to be supported as: a) new refining capacity addition is likely to be concentrated in 2HCY23 with potential delay; and b) some positive momentum is expected on oil demand in 2HCY23 due to full reopening of China. Though petchem margin improved QoQ from a low base due to sharp decline in US ethane prices, the management expects petchem margin recovery to be constrained due to volatile feedstock price, supply overhang and muted demand growth. As expected, E&P segment EBITDA was at INR 38bn in 4QFY23 (2% down QoQ) due to largely flattish volume and gas price

* Digital EBITDA in line; ARPU a tad lower while net subs addition slightly better: Jio’s standalone 4QFY23 revenue was in line with JMFe at INR 235bn (up 1.9% QoQ and up 12.2% YoY). However, its standalone 4QFY23 EBITDA was 0.7% below JMFe at INR 123.2bn (up 2.0% QoQ and up % 16.7% YoY) while overall digital segment EBITDA was in line at INR 133.9bn. EBITDA margin was 52.4% in 4QFY23 (vs. 52.3% in 3QFY23). Overall ARPU was marginally lower at INR 178.8 in 4QFY23 (vs. INR 178.2 in 3QFY23).However, net subs addition was slightly higher at 6.4mn in 4QFY23 vs. JMFe of ~5mn. Data usage per subs rose to 23.1GB/month in 4QFY23 (vs. 22.4GB/month in 3QFY23). Network cost was flattish QoQ at INR 72.2bn in 4QFY23 or 31.3% of revenue. However, other expenses came in higher than expected at INR18.1bn in 4QFY23 (up 9.9% QoQ and up 33% YoY) due to: a) continued rise in SG&A at INR 5.3bn (vs. INR 5.0bn in 3QFY23) highlighting the continued competitive intensity in the industry; and b) other expense rising to INR 5.6bn in 4QFY23 (vs. INR 5.2bn in 3QFY23). PAT was 4% below JMFe at INR 47.2bn (up 1.7% QoQ and up 13% YoY) due to higher depreciation and higher SGA/other cost.

* Retail business EBITDA up 33% YoY as strong store addition continues, though 2% below JMFe: Retail gross revenue was up 2.4% QoQ and up 19% YoY at INR 693bn. EBITDA was up 2.9% QoQ and up 33% YoY at INR 49.3bn as strong store addition continues, though EBITDA was 2% below JMFe. EBITDA margin rose 4bps QoQ to 7.1% in 4QFY23 driven by better mix due to growth in fashion & lifestyle and operating leverage. A total of 18,040 physical stores are operational (with 966 stored added in 4QFY23 with an area of 5.5mn sqft), taking the total area to 66mn sqft (vs. 60mn sqft at end-3QFY23). Digital Commerce and New Commerce businesses continued to grow and contributed to 18% of revenue. New Commerce expanded its merchant partner base by 3x YoY to +3mn.

* High capex trend continues; reported net debt flattish QoQ at INR 1,102bn at end-FY23 and RIL has guided to maintain reported net debt to EBITDA < 1x (vs 0.7x at end-FY23): RIL’s consolidated 4QFY23 capex was higher at INR 444bn, taking total FY23 capex to INR 1,418bn (vs. capex of INR 995bn in FY22) excluding INR 880bn towards 5G spectrum. Reported net debt at end-4QFY23 was flattish QoQ at INR 1,102bn. Consolidated gross debt at end-4QFY23 was INR 3,147bn (vs. INR 3,035bn at end-3QFY23), while cash and cash equivalents at end-4QFY23 was INR 2,045bn (vs. INR 1,933 bn at end-3QFY23). In addition, deferred spectrum liability was at INR 1,128bn at end-4QFY23. The management highlighted that net debt increase in FY23 was attributable to working capital change and forex translation impact. Further, the company has guided to maintain reported net debt to EBITDA at below 1x (vs. reported net debt to EBITDA of ~0.7x at end-FY23).

* Reiterate BUY given RIL’s industry leading capabilities across businesses, which is likely to drive robust 13-14% EPS CAGR over the next 3-5 years: We marginally tweak our estimates by 1% incorporating the FY23 results; our TP remains unchanged at INR 2,900. As highlighted in our Mar’23 note, the recent weakness in RIL’s share price, primarily due to concerns around high capex and resultant rising debt, has meant that its CMP is near our bear-case valuation of ~INR 2,000/share. Though continued high capex is a key nearterm concern, we reiterate our BUY given RIL’s industry leading capabilities which is likely to drive robust 13-14% EPS CAGR over next 3-5 years - A Giant Digital Leap. We expect Jio’s ARPU to rise at 10% CAGR over FY23-28 with ARPU being on a structural uptrend given the consolidated industry structure. Further, strong growth momentum continues in the company’s retail business as RIL is driving omni-channel capabilities across segments. Despite being contingent on global macros, RIL’s O2C business earnings are also relatively well-placed. At CMP, the stock is trading at FY25E P/E of 18.9x (3 yr avg: 23.8x) and EV/EBITDA of 10.1x (3 yr avg: 13.2x). Key risks: a) continued high capex across businesses resulting in rising net debt with limited earnings visibility from new projects; b) weak subscriber addition and limited ARPU hike; and c) weak downstream margins due to macro concerns.

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