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Steady in-line performance, capex intensity accelerates

* Reliance Industries (RIL)’s 2QFY23 consolidated revenue rose 37% YoY/5% QoQ (23% beat) mainly fueled by higher crude oil prices, while EBITDA grew 20% YoY (in line) as margin contracted 190bp YoY to 13.6%. PAT remained flat YoY (in line), dragged by lower operating profit, higher depreciation and finance cost.

* RJio’s standalone revenue rose 3% QoQ (20% YoY; in line) supported by moderate subscriber/ARPU growth of 2%/1% sequentially. EBITDA/PAT improved 5%/4% QoQ (28% YoY; in line), respectively, with 90bp margin expansion to 51% driven by lower spectrum usage charge towards 5G.

* Reliance Retail posted healthy revenue/EBITDA growth of 45%/51% YoY, respectively, (14% beat on EBITDA) in 2QFY23, led by the waning impact of the pandemic, improving customer sentiment and early onset of festivities.

* O2C EBITDA came in 5% below estimate at INR120b (-3% YoY) in 2QFY23. EBITDA/mt stood at ~USD93 (-7% YoY, -45% QoQ). Production meant for sale stood at 16.2 mmt in 2QFY23.

* Net debt, as per the company, stood at INR933b as of Sep’22 v/s 577b in Jun’22 with gross debt of INR2,949b. The increase in net debt is due to higher working capital requirement for O2C, translation charges and 5G spectrum

* Using SOTP, we value the Refining and Petrochemical segment at FY24E EV/EBITDA of 7.5x, to arrive at a valuation of INR724/sh for standalone business. We ascribe an equity valuation of INR960/sh to RJio and INR1,252/sh to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 35x for Retail and 18x for Digital Services based on Sep’24E underscore the new growth opportunities in the Digital space and steady market share gains. We retain our BUY rating with a TP of INR2,855.

RJio – growth moderates; focus now on 5G deployment

* RJio’s revenue/EBITDA grew 3%/5% QoQ (in line) in 2QFY23, fueled by subscriber/ARPU improvement of 2%/1%, respectively. RJio sustained the growth momentum adding 7.7m subscribers post-recovering from subscriber loss over 2QFY22-4QFY22; however, growth has moderated from the peak of ~15m subscriber adds until 1QFY22, given the high base. Incremental EBITDA margins for 2QFY23 of 81%, aided by reducing SUC attributed to the recently acquired 5G spectrum.

* RJio spent aggressively in the 5G auction incurring INR881b, much above our estimate of INR350b. It acquired all 5G spectrum bands: 700Mhz/3300MHz/ 26GHz. This has led to RJio’s net debt mounting to INR1.7t (including deferred spectrum liabilities, as per our working). The 5G deployment should intensify capex over the next couple of years.

* We expect revenue/EBITDA CAGR of 16%/21% over FY22E-24 backed by 10%/8% CAGR in ARPU/subs, respectively. Going forward, the market share gains from VIL, tariff hikes, wireline – Jiofibre subscriber additions and other digital avenues triggered by 5G rollout should drive growth.

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