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On sustained growth path…

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.

* At the EBITDA level in FY21, O2C and oil & gas contributed 43% while retail, digital and others contributed 11%, 38% and 8%, respectively

Q3FY22 Results: RIL’s results were ahead of estimates on profitability front.

* Revenue was up 54.3% YoY to | 191271 crore as all key segments reported revenue growth. It grew 9.9% QoQ led by retail and O2C segments

* EBITDA was at | 29706 crore, up 37.7% YoY, 14.2% QoQ. EBITDA growth YoY was mainly driven by O2C (38.7%) and oil & gas (508x) on account of better downstream demand & margins in O2C and growth in gas output as well as realisation

* Exceptional gain of | 2836 crore was reported owing to sale of shale gas assets in North America. Subsequently, PAT was at | 18549 crore, up 41.6% YoY

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 roll over valuations to FY24E and maintain our BUY rating on the stock

Target Price and Valuation: We value RIL at | 2950 on an SoTP basis.

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: Apart from 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 prices will add value

* BUY with target price of | 180

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