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Consumer business at the forefront of growth

Reliance Industries (RIL)’s 4QFY22 consolidated revenue/EBITDA was up 39%/34% YoY (~10% miss), as standalone EBITDA grew 43% YoY/5% QoQ (miss). RJio’s saw strong in-line EBITDA growth (up 27% YoY, 11% QoQ), while Retail EBITDA growth was slower than expected at 16% YoY due to the adverse impact of Omicron.

RJio’s revenue/EBITDA growth at 8%/11% QoQ (in-line), respectively, was aided by flow through of tariff hikes taken last quarter. The growth was also driven by 11% ARPU increase. This was partly offset by a third consecutive quarter of net subscriber decline of 11m as it cleans up inactive subscribers. The EBITDA margin improved 110bp sequentially to 50.3%.

Reliance Retail posted slower-than-expected net revenue/EBITDA (excluding investment income) growth at 23%/16% YoY (7% miss), led by aggressive footprint addition and partly hit by Omicron. Mar’22 ended with footfalls above pre-Covid level, offering visible green shoots for the coming quarter.

O2C EBITDA came in 13% below estimate at INR145.8b (+43% YoY). EBITDA/mt stood at ~USD111.9 (+33% YoY, +6% QoQ) fueled by better refining margins and possible inventory gains, partially offset by weak petrochem margins. Production meant for sale stood at 17.3 mmt.

RIL turned net debt with INR348b against net cash of INR36b in Sep’21 as per the management. This reflects the refinancing of high-cost spectrum liabilities of INR308b.

Using SOTP, we value the Refining and Petrochemical segment at FY24E EV/EBITDA of 7.5x, arriving at a valuation of INR728/share for standalone business. We ascribe an equity valuation of INR1,007/share to RJio and INR1,276/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 38x for Retail (core segment) and 19x for Digital Services underscore new growth opportunities in the Digital space and steady market share gains. Reiterate BUY with a TP of INR2,935

4QFY22 snapshot – consolidated EBITDA/PAT grew 34%/22%, respectively

RIL’s 4QFY22 consolidated revenue/EBITDA increased 39%/34% YoY (12%/6% QoQ) to INR2,073.8b/INR313.7b, respectively. PAT grew 22% YoY and remained flat QoQ to INR162b, aided by strong revenue growth and lower finance cost

RJio – tariff hikes propel growth

RJio saw healthy revenue/EBITDA growth of 8%/11% QoQ (in-line), led by strong 11% ARPU growth. While gross subscriber remained strong with >35m adds, churn of inactive subscribers continued to see net subscriber decline for the third straight quarter. EBITDA margin improved 110bp to 50.3%.

RJio’s FY22 saw: a) re-launch of Jiophone, b) tariff hikes and c) subscriber clean up, all of which saw revenue/EBITDA growth of 10%/22% YoY to INR770b/INR376b, respectively. PAT rose 23% over this period to INR148b

We expect revenue/EBITDA CAGR of 15%/20% over FY22-24, respectively, backed by 8% CAGR in ARPU/subs each. Going forward, focus on wireline segments – Jiofibre and SMB enterprise areas – coupled with digital avenues, tariff hikes and market share gains should drive growth.

Reliance Retail – soft quarter but revenue recovering above pre-Covid level on an exit basis

Reliance Retail’s net revenue/EBITDA posted 23.1%/2.4% YoY growth (miss), as Omicron impacted Jan’22 performance adversely. Core revenue (excluding the Connectivity) grew 25% YoY according to our calculation.

Reliance Retail added 793 new stores taking the total store count to 15,196 and added 3.1m area taking the total area to 41.6m.

Despite a challenging year, FY22 saw revenue/EBITDA growth of 27%/26% YoY on a consolidated basis to INR1,997b/INR123.8b, respectively. Revenue and EBITDA are likely to report 36% and 50% CAGR over FY22-24, respectively, propelled by accelerated store additions across segments, aggressive foray into digital and new commerce as well as recovery from the pandemic.

O2C EBITDA – miss of 13%

Revenue stood at INR1,294.8b (7% below estimate; +61% YoY), primarily due to higher realization aided by sharp increase in crude oil prices. EBITDA came in 13% lower than our estimate at INR145.8b (+43% YoY). EBITDA/mt stood at USD111.9 (+33% YoY, +6% QoQ), with production meant for sale at 17.3mmt. Reported PAT was at INR110.9b (in line with estimate; +46% YoY). The tax rate was lower at 16% owing to continued tax benefits.

In FY22, EBITDA was up 56% YoY to INR523.1b (translating into an EBITDA/mt of USD103.5 v/s ~USD70.8 in FY21). Adj. PAT stood at INR390.8b (+43% YoY).

Key macro performance highlights are as follows:

Demand for polymer improved with overall improvement in economy, while high volatility and uncertainty in feedstock prices led to slow down in global polyester markets.

Global oil demand was up 4.2mnbopd YoY – fueled by strong manufacturing and industrial growth and increased global mobility with gradual relaxation of pandemic-related restrictions.

Valuation and view

RIL’s consolidated gross debt increased to INR2,663b at end-4QFY22 (from INR2,447b and INR2,518b at end-3QFY22 and FY21, respectively), with cash & cash equivalents at INR2,315b. Net debt was at INR348b (as per management).

The stock should benefit from three areas: a) accelerated EBITDA growth in Retail business, which garners about 4x higher valuation multiple v/s overall business; b) RJio’s steady revenue growth from market share gains, tariff hikes and other wireline/digital avenues; and c) better refining margin that should translate into 20% EBITDA growth in the standalone business.

We value Reliance Retail’s core business at 38x EV/EBITDA and assign 4x multiple to Connectivity, arriving at a TP of INR1,276 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the opportunity for rapid expansion in the Retail business and the aggressive rollout of digital ventures, including the JioMart platform.

RJio is valued at an EV/EBITDA multiple of 19x on Mar’24E EBITDA, arriving at a TP of INR1,007 (adjusted for its 66% stake). The higher multiple captures the revenue opportunity in Digital, potential tariff hikes, and steady market share gains.

Opening up of the economy and removal of travel restrictions would enable demand to improve faster than expected. SG GRM further improved to an average of USD7.8/bbl in 4QFY22, as demand continues to outweigh supply.

According to IEA estimates, oil demand is likely to average 99.4mnbopd in 2022 (up 1.9mnbopd YoY). The lowering of oil demand forecast from the previously stated is mainly led by the Russia-Ukraine conflict that would result in lower Russian crude and product exports with sanctions keeping large importers away.

RIL believes that lower exports from China and peak maintenance season are going to support product margins ahead. Although, PX, PTA and MEG margins are projected to be rangebound due to capacity overhang, Polyester/Polymer demand is likely to improve with opening up of the economy and return of normalcy.

The GoI has already raised the gas price ceiling to USD9.92/mmBtu for 1HFY23. Considering the current high gas price environment, the management believes that the subsequent revision in ceiling would be even higher. A short-term impact is expected due to high gas prices but the outlook remains positive for RIL with growth in pipeline infrastructure and CGD networks. Thus, sustained high production and improved realization would result in better profitability in the segment in near future.

Factoring in the aforementioned, we estimate EBITDA of USD100/mt in FY23 and FY24 each (vis-à-vis USD109/mt and USD103/mt in 2HFY22 and FY22, respectively).

We build in a capex of INR350b per year in the standalone business, considering RIL’s investment in new-age greener businesses (such as solar energy and a hydrogen ecosystem in India).

Using SOTP, we value the Refining and Petrochemical segment at FY24E EV/EBITDA of 7.5x, arriving at a valuation of INR728/share for standalone business. We ascribe an equity valuation of INR1,007/share to RJio and INR1,276/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiples of 38x for Retail (core segment) and 19x for Digital Services underscore new growth opportunities in the Digital space and steady market share gains. Reiterate BUY with a TP of INR2,935.

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