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Refinery business fueling earnings

Consolidated Revenue/EBITDA to clock 13%/15% CAGR over FY22-FY24

* Reliance Industries (RIL)’s 1QFY23 consolidated PAT was up 46% YoY/11% QoQ (26% miss) underpinned by revenue/EBITDA growth of 57%/63% YoY, respectively. Lower-than-estimated ‘standalone’ performance led to the 10% miss in EBITDA/PAT. RJio posted healthy ARPU-led EBITDA growth – up 27% YoY and 4% QoQ – in line with our estimate, while Retail EBITDA jumped 98% YoY due to the recovery in operations.

* O2C EBITDA came in 14% below our estimate at INR220b (+92% YoY). EBITDA/mt was at ~USD169.8 (+80% YoY, +52% QoQ) fueled by better refining margin and higher inventory gains amid high crude prices. This was offset by weak petrochem margin. Production meant for sale stood at 16.9mmt.

* RJio’s strong 5% QoQ improvement in ARPU and recovery in subscriber growth after three quarters drove revenue/EBITDA growth of 5%/4% QoQ, respectively (in line). EBITDA margin contracted 20bp sequentially to 50.1%.

* Recovery from Covid-induced disruption saw Reliance Retail’s net revenue/ EBITDA jump 54%/98% YoY, respectively, as footfalls revived to 19% over pre-Covid. This translated into a healthy LFL across categories.

* RIL’s gross debt stood at INR2,634b while net debt was at INR577b. The increase in net debt was mainly due to higher working capital requirements in business with increase in energy and product prices.

* We have cut our FY23E EBITDA/PAT by 6%/10% led by 9%/11% decline in estimates of standalone EBITDA/PAT, respectively.

* Using SOTP, we value the Refining and Petrochemical segment at FY24E EV/EBITDA of 7.5x, arriving at a valuation of INR721/share for standalone business. We ascribe an equity valuation of INR960/share to RJio and INR1,173/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 39x for Retail and 18x for Digital Services underscore new growth opportunities in the Digital space and steady market share gains. Reiterate BUY with a TP of INR2,785.

O2C – 14% miss on EBITDA

* EBITDA/mt of USD169.8 (+80% YoY, +52% QoQ) was much below our estimate of USD189, with production meant for sale at 16.9mmt (+2% YoY).

* Lower-than-expected other income further widened the miss on PAT (INR151b) to 19%

* Price realization for KG-D6 gas surged 169% YoY to USD9.7/mmBtu in 1QFY23 from USD3.62/mmBtu in 1QFY22.

* Oil & Gas exploration EBITDA increased ~3.5x to INR27.1b fueled primarily by improved gas price realization in KG-D6 and CBM, and higher production in KG-D6 reaching 19mmscmd in 1QFY23.

* Domestic demand of HSD, MS and ATF increased 20.4%, 29.4% and 86.0% YoY, respectively.

* PE/PP/PVC margins contracted YoY due to sharp YoY rise in Naphtha prices.

Key macro performance highlights:

* Global refinery throughput was higher by 1.7mb/d YoY at 78.8mb/d in 1QFY23, reflecting tight market conditions.

*  Severe volatility in feedstock prices and high inflation concerns led to slow down in global Intermediates and Polyester markets

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