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Await triggers to boost stock performance

Reliance Industries’ (RIL) Q4FY21 recurring EPS was up 8% YoY driven by rise in retail and digital services EBITDA. FY21E recurring EPS was down 9% YoY with only digital services EBITDA being up YoY. Fall in Oil to Chemicals (O2C) EBITDA was modest in Q4 compared to FY21. Both Q4 and FY21 EPS was supported by sharp fall in tax.

Petrochemicals and retail were the bright spots in Q4. Retail may lose momentum due to covid second wave while petrochemicals may be hit by large capacity additions in H2/Q4FY22E. Regaining momentum in subs addition, tariff hikes, retail growth back to pre-covid levels, GRM recovery and stake sale in O2C are key to stock performance improving (underperformed since Sep’20). Retain HOLD with a target price of Rs2,033 (2% upside).

* Digital services and retail drive Q4 growth: Q4FY21 consolidated recurring profit was up 17% and EPS up 8% YoY driven by 20-31% YoY rise in retail and digital services EBITDA and 48% YoY fall in tax. O2C EBITDA was down 5% YoY, but we estimate petrochemical EBITDA rise of 52% and refining EBITDA fall of 61% YoY. FY21 recurring profit was down 1% YoY and EPS 9% YoY, despite rise in digital services EBITDA by 46% YoY, other and interest income by 24% YoY (down 17% in Q4) and fall in tax by 87% YoY, hit by fall in retail and O2C EBITDA by 12-29% YoY.

* Cut FY22E EPS by 6% and target price by 3%: We have cut RIL’s FY22E EPS by 6% mainly on cut in other income and digital services EBITDA. Target price is cut to Rs2,033 mainly on higher debt. We now estimate RIL’s FY22E pre-tax profit to be up 45% YoY and EPS to be up 25% YoY driven by rise in digital services’ EBITDA by 31% YoY, retail by 61% YoY (41% higher than in FY20) and O2C by 39% YoY. Retail EBITDA rose 20% YoY (core up 25% YoY) and 13% higher than earlier peak in Q3FY20. Downside to our FY22E retail EBITDA is not ruled out given lockdowns caused by covid second wave. RIL’s core GRM is estimated at US$7/bbl in FY22E vs US$3.7-4.1/bbl in Apr’21. Recovery in diesel cracks, which were at US$4.8/bbl in Apr’21, to over US$11/bbl is key to RIL achieving GRM of US$7/bbl.

* Delivery in new businesses and recovery in O2C key to improvement in stock performance: After surge in share price up to mid-Sep’20, RIL has underperformed the market and peers across businesses probably due to weak net subscriber (sub) additions, no tariff hikes, retail below pre-covid levels until Q3, and GRM weakness. US supply disruptions boosted petrochemical margins, especially polymer, but large capacity additions in products that account for 70% of RIL’s volumes may lead to petrochemical margin correction from FY22E highs. Stronger net sub additions, tariff hike, retail growth back to pre-covid levels, GRM recovery are key to stock performance improving. Stake sale in O2C at good valuation may also help.

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