Buy Reliance Industries Ltd For The Target Rs.2,750 By Emkay Global Financial Services
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O2C earnings miss on cost pressures; consumer businesses stable
* RIL’s consol. EBITDA missed our estimate by 10% at Rs380.0bn in Q1FY23 (up 63% yoy/21% qoq) due to O2C EBITDA miss by 20% at Rs198.9bn. APAT of Rs179.6bn was also 30% below est. on higher depreciation, interest and taxes, and lower Other Income.
* Retail EBITDA of Rs38.5bn was 4% below our est.; Jio/Upstream EBITDA of Rs117.1bn/27.4bn came in at 1%/4% higher. O2C’s buoyant distillate cracks were offset by higher crude OSPs, freight & energy costs, and shutdown in Hazira cracker and DHDS.
* Jio net subs grew by 9.7mn qoq to 420mn, while ARPU rose 5% to Rs175.7 (a 1% beat) on stabilization after SIM consolidation. Net debt rose by Rs228bn qoq to Rs577bn on higher working capital needs. Capex was elevated at Rs314bn in Q1, but funded internally.
* We cut our FY23/24/25E EPS by 29%/23%/20%, building in higher depreciation, interest costs and taxes, and lower other income and GRMs. We retain our Buy rating with a 2% cut in TP to Rs2,750, building in lower O2C margins, offset by roll-over to Sep’24E EBITDA.
Highlights: O2C feedstock/sales stood at 19.8/16.9mmt in Q1, up 3%/down 2% qoq. EBITDA/mt rose 33% qoq to USD130, driven by distillate cracks and polymer and polyester chain deltas. Upstream EBITDA rose from Rs15.6bn to Rs27.4bn with KG-D6 output at 18.9mmscmd and higher gas prices. In retail, footfalls were 19% above pre-Covid levels. In Q1, it added 792 stores, taking the total to 15,866. Rep. EBITDA of Rs38.5bn had Rs0.6bn of investment loss. The contribution of digital/new-comm. stood at ~19% of revenues, as daily orders grew 64% yoy. Jio’s core sub adds were 8.8mn vs. last three quarters of subs cleanup, while ARPU grew 5% qoq. Data usage/sub rose to 20.8GB from 19.7GB in Q4FY22.
Guidance: O2C faced cost headwinds on USD4-5/bbl rise in crude OSPs, higher energy and freight costs, despite all-time high GRMs (diesel spreads were USD50/bbl+). RIL is constructive on the O2C demand environment with prevailing Russian challenges benefiting middle distillate margins. Limited spare refining capacity, reduction in China exports and opening-up post Covid are other positives, though recession fears and global rate hikes are key risks. Jio is back on its steady growth trajectory with improving 5G-stack readiness. Store expansion and digital focus will continue in retail. MJ1 is on schedule.
Valuation: We roll over to Sep’24E, slightly raising O2C target multiple to 7.5x from 7x. In retail, we maintain a 20% discount to peer Avenue Supermart and cut blended multiple from 37x to 36.4x. We also raise consol. capex to Rs1.1trn in FY23 besides building in higher working capital as indicated in Q1. Hence, our net debt estimate also rises. While Q1 numbers were a miss and Q2 GRMs are also down, we expect them to stabilize at more normative levels and upcoming winter to provide support. Consumer businesses’ outlook is steady, though we await updates on 5G. Maintain Buy and any price correction would be a good entry point. Key risks: adverse commodity/currency; B2C competition; and new business risks.
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