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Oil and Gas shines, Retail recovers, RJio sees a consolidation in subscribers

* Consolidated/standalone business EBITDA grew 51%/37% YoY (13%/11% beat led by the standalone business which saw a growth of 62% YoY and 8% QoQ) in 2QFY22. RJio’s EBITDA was in line (up 20% YoY and 4% QoQ). The same for Reliance Retail recovered by 45% YoY, 19% above our estimate.

* RJio’s revenue/EBITDA growth was moderate at 4% QoQ (in line) as a sharp (net 11.1m decline) cleanup in subscribers was offset by a 4% ARPU increase and a 10bp margin expansion to 48%.

* Reliance Retail’s net revenue grew 9% YoY (8% above pre-COVID or 2QFY20 levels) to INR399b. The 180bp EBITDA margin improvement (core margin improvement of 280bp) led to a 45% YoY growth to INR29b (19% beat and 25% above pre-COVID levels), including an investment income of INR4.8b.

* O2C EBITDA came in 17% higher than our estimate at INR124b (+62% YoY). It benefitted from fuel cracks, efficient product placement, and yield management. EBITDA/mt stood at USD100 (+49% YoY and +6% QoQ), with production meant for sale in line with our estimate at 16.8mmt. 

* Using SoTP, we value the Refining and Petrochemical segment at 7.5x FY24E EV/EBITDA to arrive at a valuation of INR775/share for the standalone entity. We ascribe an equity valuation of INR880/share to RJio and INR1,200/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiple of 33x/19x for Retail/Digital Services underscores new growth opportunities in the Digital space, along with the rationalization of tariffs in RJio. We reiterate our Buy rating with a TP of INR2,900/share.

2QFY22 snapshot: Consolidated PAT beats our estimate on strong standalone performance

RIL’s revenue/EBITDA increased by 51%/37% YoY (20%/11% QoQ) to INR1,676b/INR260b, 13%/11% beat led by the standalone business. PBT before exceptional items grew 83% YoY to INR192b, aided by strong revenue growth (15% beat). Reported PAT grew 43% YoY to INR137b (24% beat). PAT grew by 74% YoY (76% QoQ) to INR17b.

RJio – subscriber cleanup in progress; JioPhone launch to drive growth

* Revenue/EBITDA grew at a moderate 4% QoQ (in line), despite a sharp 11.1m net subscriber decline (2.5% QoQ) due to the cleanup of inactive subscribers, but was offset by a 4% increase in ARPUs.

* EBITDA margin remained flat with a 10bp improvement to 48%. EBITDA growth has moderated v/s the 43% growth in FY21, led by a base effect. Subsequently, reported PAT grew by 24% YoY to INR35b

* We expect revenue/EBITDA growth of 8%/18% in FY22E, which may slow down to 15% EBITDA CAGR over FY22-24E in the absence of tariff hikes, despite building healthy subscriber additions.

* RJio upcoming JioPhone launch, JioFiber additions, and early 5G adoption could accelerate its growth momentum.

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