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Raises tariffs; pricing still at discount to peers…

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.

* On a consolidated basis, O2C and oil & gas contributed 62% to revenue, while retail, digital and others contributed 28%, 3% and 7%, respectively. At the EBITDA level, O2C and oil & gas contributed 43% while retail, digital and others contributed 11%, 38% and 8%, respectively

Key event: Reliance Jio raised its prepaid tariffs by ~20% across the board, albeit maintaining the popular packs pricing at 7-14% discount to peers.

* We expect the full tariff hike flow through to raise the annualised revenues, EBITDA run rate by ~19%, ~35%, respectively, from current levels.

* Since we had already baked in ~15% step up hike in FY23, accelerated and slightly higher hike to result in ~6%, ~8% upgrade in FY23 Jio’s revenue, EBITDA estimates, respectively. At RIL levels, FY22, FY23 revenues and EBITDA were upgraded by 0.4%, 0.8% and 2.2%,2.7%, respectively

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 post fund raising while its traditional business will continue to generate steady cash flows.

* We upgrade the stock to BUY after ~9% correction in the last 1.5 months

Target Price and Valuation: On an SOTP basis, we value the stock at | 2925/share

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 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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