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3QFY21 snapshot: Consol. miss on the back of standalone EBITDA miss

* RIL’s revenue/EBITDA increased 6%/14% QoQ to INR1,179b/INR216b (8%/6% miss; down 23%/5% YoY). Other income grew 5% QoQ to INR44.5b (v/s est. INR25.7b). Subsequently, PBT before exceptional items increased 43% QoQ to INR150b (in-line). RIL reported exceptional items of INR1.2b in 3QFY21. Thus, reported PAT improved 37% QoQ to INR131 (+13% YoY) with nil tax rate. Adjusted for exceptional items, it was up 38% QoQ to INR132b (42% beat).

* Standalone EBITDA at INR86.9b came in below our est. (of -16%; -33% YoY and +14% QoQ). PBT stood at INR69.6b. The company impaired its US shale assets and recorded an exceptional item of INR1.16b. Furthermore, the company enjoyed the benefit of lower tax rate (for the second consecutive quarter) and realized tax credit of INR17.9b. Reported PAT stood at INR86.3b, while adj. (for exceptional) PAT stood at INR87.7b (-8% YoY and +34% QoQ).

* Standalone EBITDA / adj. PAT declined 42%/30% in 9MFY21 to INR234b/INR197b. Consolidated revenue / EBITDA / adj. PAT declined 31%/13%/6% to INR3,173b/INR574b/INR312b. The impact on consol. was cushioned by a better performance in the Consumer business.

RJio – eyeing new growth engines as subscriber growth slows

* RJio reported revenue/EBITDA growth of 6%/8% QoQ (in-line), led by 4% growth in ARPU and 1% subscribers adds (5.2m adds). The EBITDA margin saw 100bp improvement to 43.9%, with an incremental EBITDA margin of 60%. Cumulative ARPU improvement in the last five quarters (from 2QFY20 to 3QFY21) has been 18%.

* RJio’s 9MFY21 revenue/EBITDA grew 35%/47% to INR525b/INR226b. PAT was up 1.68x over this period to INR87b.

* We expect revenue growth of 17%/14% and EBITDA growth of 44%/16% over FY22/FY23E, on the back of an 8% subscriber CAGR over FY21–23E. RJio is building capabilities in new-age technologies, aggressively rolling out fiber services, and eyeing low-cost Feature Phone Devices to accelerate its growth momentum.

Reliance Retail – margins deliver despite weak revenue performance

* Reliance Retail’s LTL net revenues declined 9% YoY (29% miss), but EBITDA grew 13% YoY (10% beat) – led by cost management initiatives and higher investment income of INR8b.

* In 9MFY21, the company’s revenue/EBITDA declined 11%/13% to INR1,105b/INR62b, weighed by nationwide lockdown due to the COVID-19 outbreak.

* Core revenues are estimated to decline 30% YoY (after excluding the Connectivity biz). This is surprisingly weaker than 2QFY21. Nevertheless, the core EBITDA margin (excluding Connectivity and investment income) has improved to ~10% – 40bp better YoY, as per our workings.

* Around 96% of stores were operational, with 52% being fully operational, as restrictions on timings persisted. Footfall was still 75% of pre-COVID levels. Yet, the business added net 270 new stores.

Oil-to-chemicals – gearing up for the next orbital change?

* RIL has reorganized the Refining and Petrochemical segment into the Oil-toChemicals (O2C) business. The management has formalized this plan to:

      * Facilitate holistic and agile decision making

      * Bring flexibility to new strategic partnerships in the future

      * Drive the business further toward downstream – closer to the customer

      * Provide sustainable and affordable energy and material solutions

* In our report Oil-to-chemicals – Gearing up for next orbital change? (July’20), we highlighted how refiners across the globe are increasing conversion to O2C, with complex projects such as delayed coker (or petcoke gasifier) – this is transforming low-value products into high-value products.

* RIL has been rigorous in its efforts to reduce earnings volatility and drive better margins through value-added products (be it with the installation of a delayed coker – to achieve higher middle distillate yield, the setting up of a petcoke gasifier for higher savings, or competitive crude sourcing or improving integration with its petchem units). The company has also achieved higher feedstock flexibility with further downward integration over the last 3–4 years.

* The aforementioned factors have helped the company achieve higher utilization rates at its refining and petchem units in these COVID times – when demand challenges have presented constraints for various companies across the globe.

* O2C projects are largely aimed at increasing the yield of light olefins or aromatics such as benzene, toluene, and xylene (highlighted in Exhibit 27).

* RIL has one of the most complex and integrated units, with conversion at ~24% in FY20. While the conversion may not increase in the medium term, we reiterate our belief in the company’s plan to integrate O2C to generate better margins going forward (especially in a subdued refining margin environment, further weighed by huge capacity additions in petchem).

Valuation and view

* Conso. Dec’20 debt stood at INR2,574b and cash and equivalents at INR2,205b. The company received INR735b in 3QFY21, and considering balance commitments of INR398b, ceteris paribus, the company’s net cash stood at INR30b.

* 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, Jio Platforms is creating multiple monetization opportunities in the Digital space.

* Thus, we assign an EV/EBITDA multiple of 17x on FY23 EBITDA, maintaining TP of INR900/share (for its 66% stake). The higher multiple captures digital revenue opportunity, potential tariff hikes, and opportunity in the Low-cost Device market, among others, not built into our estimates.

* We roll forward the valuation on an FY23 basis, valuing Reliance Retail’s core business at 30x EV/EBITDA and assigning 4x to Connectivity, arriving at TP of INR645 – 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 the JioMart platform.

* As discussed in our report Manifesting the standalone business, the recent up move in petchem margins has partially offset the pain on the refining side.

* RIL believes demand for PVC, PP, and Polyester is expected to remain firm on account of improving end markets.

* Although, we believe the spike in petchem margins is led by pent-up demand post COVID. Moreover, huge capacity additions in China would further lead to pressure on petchem margins in the coming months.

* RIL recently commissioned gas production from its R-series cluster. KG basin is expected to achieve peak production of ~30mmscmd over the next two years (v/s current production of ~4.5mmscmd – commissioned on 18th Dec’20).

* Using SOTP, we value the Refining and Petrochemical segment at 7.5x FY23E EV/EBITDA to arrive at a valuation of INR780/share for standalone. We ascribe an equity valuation of INR900/share to RJio and INR645/share to Reliance Retail. Reiterate Buy, with Target Price of INR2,325/share.

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