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Comprehensive beat across segments; BUY

Our view

RIL reported a comprehensive beat across segments, with reported operating profits above our (+8%) and street (+5%) estimates. Stronger refining margins, aided by revival in petroleum demand due to improved mobility, higher footfalls and operating days in Retail segment as localized lockdowns eased and sequentially higher ARPU in the telecom segment aided better profitability. In addition, higher natural gas production from KG D6 and better realization in CBM and US shale further helped RIL report stronger earnings. While RIL has generated a strong 24% return over past 3M, however we maintain our BUY rating on the stock and raise TP to Rs 2860/sh (from Rs 2440/sh) as we factor in for value accretion (Rs 340/sh) from investment in renewable energy.

Result Highlights

* Revenue: The consolidated net‐revenue stood at Rs 1676 (+51% YoY; +20% QoQ), driven by better realizations in O2C segment and improved sales in Retail segment, as footfalls improved with easing of localized lockdowns.   

* Operating Profits: Consolidated Ebitda at Rs 260bn (+37% YoY; +11% QoQ), stood above our and street estimates, driven a) stronger refining margins, b) improvement in telecom ARPU and c) higher profitability in Retail and Oil & Gas    

* Consolidated PAT: stood at Rs 155bn (+46% YoY; +12% YoY)

* O2C Segment Ebitda: at Rs 127bn (+44% YoY; +4% QoQ) on better refining margins and petroleum/petrochemical demand

* Oil & Gas Ebitda: stood at Rs 10.7bn (+34% QoQ) aided by QoQ higher production in KG D6 and better realization in US shale and CBM

* Digital Service Ebitda: at Rs 95.6bn (+15% YoY; +3% QoQ) as ARPU rises to 143 but net loss of 11mn subscribers on sim consolidation

* Retail Ebitda:  at Rs 29.3bn (+45% YoY; +50% QoQ) on strong growth in fashion and lifestyle, with steady consumer electronics and grocery segments

* Finance Cost: At Rs 38bn stood lower by 37% YoY but 12% higher QoQ

* Net‐Debt: The gross debt for the quarter stood at Rs 2558.9bn (1QFY22: Rs 2538.5bn) and cash & equivalents at Rs 2594.7bn (1Q: Rs 2577bn), implying a net‐ cash position of Rs 35.8bn (1Q: Rs 38.6bn)

* Capex: Capex for 2QFY22 stood at Rs 250.4bn(1Q:  Rs 166.8bn); in addition, RJIL invested Rs 143.1bn (1Q:Rs 293bn) in spectrum acquisition

Valuation

We value RIL at Rs 2860/sh, on SOTP basis, implying a target P/E multiple of 24x FY24e, as against 22x the stock is currently trading at.   

While existing business segments account for an EV of Rs 2568/sh, we account for an additional Rs 343/sh (at 3x proposed investment of USD 10bn) for RIL’s renewable foray, thereby arriving at a comprehensive EV of Rs 2911/sh, which adjusted for debt (Rs 324/sh) and cash & eq (Rs 271/sh), help us arrive at our revised target price.  

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