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Strong earnings traction across segments; BUY

Our view

RIL’s operating profits at Rs 297bn, stood marginally above our (~7%) and street estimates (~5%). The profitability improved on a sequential basis across segments. While O2C segment benefitted from an improved refining and petrochemical margins environment, which was partially offset by weaker petroleum/petrochemical demand sentiment; the profitability in Retail segment received a significant leg up from improved consumption sentiment during festive season. The digital services business on one hand benefitted from improved ARPU, but on the other hand suffered from net reduction in subscriber for 2nd consecutive quarter. We however believe that weeding out of inconsistent and low value customer stands in good stead in the longer run for JIO. Additionally, while petroleum consumption might remain tepid in 4QFY22 as well, due to Omicron spread, but is later slated to grow in sync with economic growth.

Result Highlights

* Revenue: The consolidated net‐revenue stood at Rs 1850bn (+57% YoY; +10% QoQ), driven by a) stronger realization/ refining margins in O2C segment, b) festive season demand driving strong sales in Retail segment, c) improvement in Jio’s ARPU on sim consolidation and tariff hikes and d) higher gas realization for KGD6.

* Operating Profits: Consolidated Ebitda at Rs 297bn (+38% YoY; +14% QoQ), stood above our and street estimates (by 5‐7%), driven a) stronger refining margins, b) improvement in telecom ARPU and c) higher profitability in Retail and Oil & Gas    

* Consolidated PAT: stood at Rs 205.4bn (+38% YoY; +33% YoY). Other than strong operating profit, PAT was also aided by one‐time gain of Rs 28.4bn, stemming from divestment of interest in Eagle Ford Shale, US.  

* O2C Segment Ebitda: at Rs 135.3bn (+39% YoY; +6% QoQ) on better refining margins even as domestic petroleum and petrochemical consumption was impacted by price volatility.  

* Oil & Gas Ebitda: stood at Rs 20.3bn (+90% QoQ) aided by near doubling of gas realization to USD 6.13/mmbtu (2Q: USD 3.62/mmbtu), even as production remained steady at ~18mmscmd.  

* Digital Service Ebitda: at Rs 102.3bn (+14% YoY; +7% QoQ) as ARPU rises to 151.6 but subscribers base suffers net loss of 8.5mn,  on sim consolidation

* Retail Ebitda:  at Rs 38.4bn (+24% YoY; +31% QoQ) on strong 2x YoY growth in consumer electronics and fashion & lifestyle segments sales.

* Finance Cost: At Rs 38bn stood lower by 12% YoY but flat QoQ.

* Net‐Debt: The gross debt at the end of 3QFY22 stood at Rs 2447.1bn (2QFY22: Rs 2558.9bn) and cash & equivalents at Rs 2418.5bn (2Q: Rs 2594.7bn), implying a net‐debt position of Rs 28.6bn (2Q: Rs (35.8)bn)

* Capex: Capex for 3QFY22 stood at Rs 275.8bn (2Q: Rs 250.4bn), implying a 9MFY22 capex of Rs 693bn. In addition, Rs 435.8bn was spent towards spectrum.

Valuation

We value RIL at Rs 2845/sh, on SOTP basis, implying a target P/E multiple of 22.6x FY24e, as against 19.7x the stock is currently trading at.

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