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Consumer biz continues to show strong performance

* Reliance Industries (RIL)’s 4QFY21 consolidated/standalone business EBITDA was down 10%/9% YoY (in-line). RJio EBITDA was in-line (up 6% YoY), while Retail EBITDA was up 42% YoY (8% miss) on a steady revenue increase.

* Reliance Jio (RJio)’s revenue fell 6% – as the removal of IUC charges dragged down ARPU by 9% – partially offset by 4% subscriber growth. EBITDA growth slowed to 2% QoQ (in-line) – margins expanded 390bp to 47.8% on the IUC impact.

* Reliance Retail (RRVL)’s net revenues increased by a strong 21% YoY to INR413b (7% beat). EBITDA was up 42% YoY, with 130bp margin improvement on INR5b investment income and cost management initiatives.

* The company reported Oil-to-Chemicals (O2C) EBITDA of INR101.9b (+17% est., -12% YoY) in 4QFY21, above our estimates. Production meant for sale stood at 16.6mmt – translating to EBITDA/mt of USD84.1 in 4QFY21 (up from USD71.9 in 3QFY21). During the year, the company formalized the integration of its Refining and Petrochemical business in O2C – which, we believe, may result in value unlocking as seen in retail and digital segments. In the Oil & Gas segment, it exited the loss-making Marcellus US Shale assets but commenced gas production at its domestic KG D6 field ahead of schedule.

* As discussed in our recent report, Reiterate our faith in the businesses, we highlight the likelihood of strong economic recovery in 2HCY21 – as various countries boost their vaccination drives and end the stringent lockdowns.

* Using SOTP, we value the O2C business at FY23E EV/EBITDA of 7.5x, arriving at a valuation of INR713/share for the standalone business and add INR61 for the E&P assets. We ascribe an equity valuation of a) INR755/share to RJio on FY23E 18x EV/EBITDA and b) INR670/share to Reliance Retail on FY23E 31x EV/EBITDA, factoring in the recent stake sale. Our higher multiple to the Retail and Digital biz underscores the strong growth in new commerce, coupled with opportunities in the Digital space and tariff rationalization. Reiterate Buy, with Target Price of INR2,195/share.

RJio – targeting JioPhone, MSMB space for growth revival

* RJio reported revenue decline of 6% and EBITDA growth of just 2% QoQ (inline), on account of a 9% drop in ARPU, partly offset by 4% subscribers adds (15.4m adds); this was attributable to the removal of the IUC regime. EBITDA margins improved 390bp to 47.8%.

* FY21 revenue/EBITDA/PAT increased 28.7%/43.3%/116% to INR699b/INR309b/INR120b.

* RJio aims to accelerate growth on the back of a) an addressable market of 300m feature phone subscribers, b) its foray into Enterprise Services, and c) its venture into new Digital avenues. We expect revenue/EBITDA growth CAGR of 11%/19%, on the back of a 10% subscriber CAGR, over FY21–23E.

Reliance Retail – multiple growth levers

* Reliance Retail’s net revenues/EBITDA grew 21%/42% YoY to INR413b/INR36b, supported by all-time high revenues from Grocery, Fashion & Lifestyle, and New Commerce.

* In FY21, the company’s revenue declined 3% to INR1,576b, while EBITDA was flat at INR97b, weighed by a) the nationwide lockdown due to the COVID-19 outbreak and b) the transfer of petro-retailing segment to Reliance-BP Mobility.

* Core revenues are estimated to decline 20% YoY (after excluding the Connectivity biz). Improvement was seen on the back of recovery in Grocery and Consumer Electronics, led by the JioPhone relaunch. The core EBITDA margin, excluding the Connectivity biz and investment income, improved to ~10% (40bp better YoY, as per our workings).

* As of Mar’21, 94% of stores were operational and footfall was at 88% of preCOVID levels, with 828 store additions. However, the situation has turned grim since the 2nd COVID wave in April, with footfall at 35–40%.

Valuation and view

* Debt: With a sharp rise in non-current and current assets, conso. debt has remained high at INR2,574b, with cash and equivalents at INR2,205b. The company received INR735b in 3QFY21, and considering balance commitments of INR398b, ceteris paribus, its net cash stands at INR30b.

* RJIO: RJio plans to accelerate growth through JioPhone, Enterprise Data, and other digital avenues via the recent spate of launches, coupled with new digital app offerings. Thus, we assign an EV/EBITDA multiple of 18x on FY23 EBITDA, with TP of INR755/share (for its 66% stake). The higher multiple captures digital revenue opportunity, potential tariff hikes, and opportunity in the Feature Phone market (not built into our estimates).

* Retail: We value Reliance Retail’s core business at 31x FY23E EV/EBITDA and assign 4x to Connectivity, arriving at TP of INR670 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the accelerated growth in new store openings, digital commerce, and the new JioMart platform.

* O2C: RIL expects demand for PVC, PP, and Polyester to remain firm on account of strong downstream demand. Although, a) large cracker capacity additions globally (~12mmtpa each over 2020–21) and b) the supply glut amid higher exports from China are likely to threaten current multi-year high margins.

* Since the company reports a combined O2C EBITDA only, we build in EBITDA of USD107/mt / USD125/mt for FY22/FY23E (vis-à-vis USD73–84/mt reported over 3Q–4QFY21) – on the back of improved refining and petchem margins. While we may see contraction in petrochem margins, SG GRM which stood at USD1.8/bbl in 4QFY21 is likely to revert to long term average of USD5-6/bbl (Apr’21 average at USD2.6/bbl).

* Gas production of +18mmscmd is expected in FY22 (from the already commissioned R-cluster and Sat-cluster), while the MJ cluster would be commissioned in 3QFY23. RIL has successfully completed three rounds (two for KG D6 gas and one for CBM) and plans to announce the fourth round (for KG D6 gas) in May’21. The KG Basin is expected to achieve peak production of ~30mmscmd over the next two years.

* Using SOTP, we value the O2C business at FY23E EV/EBITDA of 7.5x, arriving at a valuation of INR713/share for the standalone business and add INR61 for the E&P assets. We ascribe an equity valuation of a) INR755/share to RJio on FY23E 18x EV/EBITDA and b) INR670/share to Reliance Retail on FY23E 31x EV/EBITDA, factoring in the recent stake sale. Reiterate Buy, with TP of INR2,195/share.

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