Hold Reliance Industries Ltd For Target Rs.2,050 - Emkay Global
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Largely neutral results; ARPU print slightly better than expected
* Q3FY21 consolidated EBITDA/PAT of Rs215.7bn/Rs131bn beat our estimates by 3%/9%, driven by better-than-expected Jio ARPU, slight O2C beat, higher-than-estimated interest cost decline and tax rate of 1% (vs. 5% built) from petroleum segment restructuring.
* RIL clubbed refining and petchem into a single O2C business (as per ongoing restructuring) and discontinued disclosures of GRMs and petchem production breakup. Broadly, O2C EBITDA was ~2% above estimates on slightly higher volumes/margins.
* Jio revenue/EBITDA beat estimates by 2-3% as ARPU rose 4% to Rs151, aided by FTTH. Net subscriber additions were weak at 5.2mn. Retail’s adj. EBITDA stood at Rs23.3bn with Rs7.8bn investment income. Revenue fell 19% yoy/10% qoq with petro moved to BP JV.
* We cut FY21-23E retail EBITDA by 11-13% but overall EBITDA estimates are unchanged, as we build in higher O2C margins. We roll over to FY23E earnings and raise the TP by 4% to Rs2,050. RIL’s net debt was higher than our expectation. Retain Hold and EW.
Highlights: O2C EBITDA fell 28% yoy (up 10% qoq) to Rs97.6bn, with 3% qoq expansion in unit margins while volumes rose 8-9%. As per new reporting, the O2C segment’s throughput/ sale stood at 18.2/16.2mmt, while refining volume was 16.7mmt. KG R Cluster gas production started from mid-Dec’20. Jio revenue rose 5.8% qoq/32.4% yoy to Rs184.9bn, while EBITDA margin expanded 95bps qoq. Network opex/License fees increased 4.2%/4.8% qoq to Rs56.5bn/Rs20.4bn. S&D/employee cost was up 3.9%/3.6% qoq at Rs7.9/3.4bn. RIL’s consolidated interest cost fell 29% qoq to Rs43.3bn, while Other Income was up 5% qoq at Rs44.5bn. There was Rs1.2bn exceptional item on US shale impairment, partially offset by deferred taxes. Minority interest was Rs17.9bn (vs. estimates Rs14bn). Net debt fell by Rs567bn qoq to Rs369bn vs Rs735bn inflow from JPL/RRVL stake sale.
Guidance: O2C integration is a move toward shifting the Jamnagar complex further downstream and there would be scale and synergies. Recovery in global demand implies constructive margin scenario for O2C (transport and polymers) and earnings outlook for retail. Gasifiers are operating at healthy ~80% utilization. ETR would normalize next fiscal. Capex run-rate has been range-bound. R Cluster gas output is currently at 4.5mmscmd and would touch 12.9mmscmd peak this year. The second bidding round is launched. KG ultra-deep (new play) would see seismic in Q4FY21. In Jio, FTTH is scaling up rapidly and Covid-related local issues are subsiding. Retail saw strong recovery in Fashion & Lifestyle with grocery and electronics being steady. It is focused on store opening and scaling up new ventures.
Valuation: We lower FY22/23E EPS by 4%, assuming lower Other Income/higher minority interest based on Q3 run-rate. We value RIL on a SOTP basis, keeping multiples unchanged. Key risks: Adverse commodity margins/currency, competition and corporate events.
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