Accumulate Reliance Industries Ltd For Target Rs. 1,493 By Elara Capital
Growth driven by Telecom and Retail
Reliance Industries (RELIANCE IN) has outperformed the benchmark indices– BSE Sensex (by 2%) and BSE Oil & Gas Index (by 4%) – due to YoY earnings growth in Q4FY25 even as rest of the oil & gas stocks expect a YoY drop in earnings. Benefits from a tariff hike in Telecom and growth in Retail may have been partly diluted by weak refining and petrochemical margin due to concerns over global oil demand, global oversupply due to tariff war and muted demand in China. We reiterate Accumulate. Key monitorables would be any possibility of an IPO plan for Digital Services (Telecom) or Retail and strong oil demand growth globally that could drive refining and petchem margin.
Q4 consolidated EBITDA up 3% YoY: RELIANCE’s EBITDA was up 3% YoY to INR 438bn in Q4, in line with our INR 441bn estimate. PAT improved 2% YoY to INR 194bn (in-line with our INR 192bn estimate). YoY EBITDA growth was led by an EBITDA growth of 18% in Digital Services to INR 173bn and a 15% EBITDA growth in Retail to INR 65bn, though partly offset by a 10% drop in EBITDA of the Oil-to-Chemicals (O2C) segment to INR 151bn (though up 5% QoQ) and a 9% decline in EBITDA of the Oil & Gas (E&P) segment to INR 51bn.
O2C – EBITDA fell 10% YoY: O2C EBITDA de-grew due to a drop in transportation fuel cracks (down 37-55% YoY) on demand slowdown and high inventory, though partly offset by higher margin YoY in PP and PVC. However, polyester chain deltas (down 15% YoY) and PE delta are near 15-20 year low on Chinese oversupply. Going forward, expect pressure on transportation fuel cracks, in-line with our concern due to a slowdown in China demand, tariff war and higher addition in refining capacity globally. E&P EBITDA declined 9% YoY to INR 51bn versus our estimate of INR 56bn due to a drop in KG-D6 gas production and lower CBM realization.
Digital Services continue to grow at a strong clip: EBITDA from Digital Services rose an impressive 18% YoY to INR 173bn (Elara estimate INR 171bn), as average revenue per user (ARPU) grew 13% YoY to INR 206 (post the tariff hike in July 2024). Also, the customer base grew 1% YoY to 488mn and data traffic rose 20% YoY to 48.9bn GB. Benefits of the past tariff hike are expected to play out in the subsequent quarters. We expect an 11% revenue and EBITDA CAGR each for the Digital Services through FY25-28E, driven by growth in data usage, rising 5G adoption, and expansion in AirFiber/broadband infrastructure.
Retail – Demand growth accelerating: Retail EBITDA was up 15% YoY versus 1-11% YoY growth in Q1-Q3FY25, led by growth in Consumer Electronics, Fashion & Lifestyle and Grocery segments. However, EBITDA fell 2% QoQ due to a seasonal demand decline post the festival season. As per RELIANCE, the focus on streamlining of operations is over, which we believe led to a deceleration in EBITDA in Q4FY24-Q2FY25. Going forward, expect revenue and EBITDA CAGRs at 13% and 17% through FY25-28E due to focus on improving efficiency and rising per capita income.
Retain Accumulate: We reduce FY27E EPS by 3%, on lower other income and lower EBITDA from Digital Services, though partially offset by higher Retail EBITDA. We maintain our TP at INR 1,493. We assume FY27E EV/EBITDA for Digital Services at 15.0x (from 15.5x). Also, we ascribe 21.8x (unchanged) FY27E EV/EBITDA to Retail, 5.5x (unchanged) to O2C and assume FY26E-28E USD-INR at 87.0 (from 86.0).
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