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Imposition of excise duty to cap refining gains…

About the stock: Reliance Industries (RIL) is one of India’s biggest conglomerates with a presence in oil refining & marketing and petrochemicals, oil & gas exploration, retail, digital services and media, etc, making it a well-diversified business entity

* At the EBITDA level in FY22, O2C and oil & gas contributed 49% while retail, digital and others contributed 10%, 34% and 7%, respectively

Key event: Government of India has imposed additional excise duty of | 13/litre on diesel exports. Also, excise duty on petrol and ATF exports was raised by of | 6/litre

* RIL has total refining capacity of 68 MMTPA and one of the refineries is export focused

* Product cracks of diesel, petrol and ATF continue to trade at elevated levels. While the company is expected to report a sharp surge in profit in Q1FY23E, excise duty on product exports is likely to limit gains in the refining segment, going ahead, as per our understanding

* The government will review the excise duty for recalibration every 15 days. The strategy of the company regarding export volume and global refining scenario will be the key monitorable in the near term.

What should investors do?

Long term prospects and dominant standing of RIL in each of its product & service portfolio, provide comfort for long term value creation. RIL’s consumer business will be the growth driver, going ahead. The company has a strong balance sheet while its traditional business will continue to generate steady cash flows amid a favourable global scenario

*We maintain our BUY rating on the stock

Key triggers for future price performance:

* Increment value accretion from the ‘digital ecosystem’ that will be captured at the Jio Platforms (JPL) level

* Steady FCF generation in the retail segment would enable the company to maintain debt at lower levels and improve its ability to invest in future inorganic opportunities

* Steady cash flow in O2C segment is expected to continue amid favourable global scenario and will enable RIL to invest in new energy verticals

Alternate Stock Idea: Besides RIL, in our oil & gas coverage we also like Gail.

* Gail is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil & gas prices will add value

* BUY with a target price of | 180

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