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In-line results; rebound in retail business growth provides comfort - BUY

RIL’s consolidated 4QFY25 EBITDA at INR 438bn (flat QoQ and up 3.1% YoY) was a tad below JMFe of INR 441bn but slightly above consensus of INR 434bn. Digital and Retail EBITDA was 2-3% above JMFe, but was offset by slightly lower EBITDA in O2C and E&P segments. Robust growth was seen in Retail EBITDA, up 14.3% YoY at INR 67.2bn (3.4% above JMFe) led by 15.7% YoY growth in revenue driven by: a) strong growth in grocery across categories led by general merchandise and value apparel; b) traction in consumer brands; and c) steady performance in the F&L segment. Digital EBITDA also was 2.2% above JMFe at INR 173bn on slightly better ARPU while subs addition was robust at 6.1mn; the management didn’t comment on the timeline for Jio’s IPO or the next tariff hike. However, O2C EBITDA was largely in line at INR 151bn while E&P EBITDA was 2% below JMFe at INR 51.2bn due to decline in KG D6 gas output. The management said the Petchem and Clean energy projects were largely on track. Consolidated capex was up QoQ to INR 360bn in 4QFY25 (vs. INR 323bn in 3QFY25); net debt was slightly higher by INR 16bn QoQ at INR 1,171bn. We reiterate BUY (TP of INR 1,580) as we expect net debt to decline gradually, and also because RIL has industry leading capabilities across businesses to drive robust 15-20% EPS CAGR over the next 3-5 years, particularly driven by both consumer businesses.

* Robust growth in Retail EBITDA, up 14.3% YoY at INR 67.2bn (3.4% above JMFe) led by 15.7% YoY growth in revenue: Retail gross revenue was INR 886bn (up 15.7% YoY, though down 1.9% QoQ on a high base of strong festive demand in 3QFY25); hence, Retail EBITDA was also strong at INR 67.1bn (up 14.3% YoY, though down 1.7% QoQ on a high base). EBITDA margin was steady QoQ at 7.6% in 4QFY25. The management attributed the strong YoY growth in Retail revenue and EBITDA in 4QFY25 to strong footfalls and positive consumer portfolio traction led by: a) robust growth in grocery across categories led by general merchandise and value apparel; b) traction in consumer brands; and c) steady performance in Fashion and Lifestyle (F&L) segment led by the wedding season and regional festivals. A total of 19,340 physical stores are operational (238 net stores added in 4QFY25, but total area was unchanged at 77.4mn sqft, probably as a few larger stores got rationalised and replaced by smaller stores).

* Digital EBITDA 2.2% above JMFe at INR 173bn on slightly better ARPU, while subs addition was robust at 6.1mn; didn’t comment on timeline for Jio IPO or next tariff hike: Digital segment EBITDA, at INR 172bn (up 3.8% QoQ and up 18% YoY), was 2.2% above JMFe as ARPU was slightly better at INR 206 (vs. JMFe of INR 205 and vs. INR 203.3 in 3QFY25 despite 2 less days in the quarter) aided by residual pass-through of the Jul'24 tariff hike. The management added that some residual tariff hike pass-through was likely in 1QFY26. Further, net subscriber addition was robust at 6.1mn (vs. JMFe of 6mn). Jio’s standalone 4QFY25 revenue was 1% above JMFe at INR 304bn (up 2.5% QoQ and up 16.4% YoY). However, opex was also 1.2% higher than JMFe; hence, Jio’s standalone 4QFY25 EBITDA was only 0.8% above JMFe at INR 162bn (up 2.5% QoQ and up 17.9% YoY); EBITDA margin was steady QoQ at 53.3% in 4QFY25. Access charges, licence fees & spectrum usage charges and SG&A and other costs were higher than expected while network costs were lower than expected. Around 191mn subs migrated to Jio’s 5G network (vs. around 170mn at end-3QFY25); JioAirFiber continues to see strong uptake and there were over 5.6mn JioAirFiber connections at end-4QFY25 (vs. over 4.5mn at end-3QFY25). Data usage per subs has risen 4% QoQ to 33.6GB/month driven by higher mix of 5G and home users. The management didn’t comment on the timeline for Jio’s IPO or the next tariff hike (as it will be speculative). However, it clarified that most of the 5G equipment had been capitalised during end of 4QFY25, so that should be reflected from 1QFY26 onwards; it didn’t share any capex guidance but reiterated that bulk of Jio capex is behind.

* O2C EBITDA in line at INR 151bn while E&P EBITDA was 2% below JMFe at INR 51.2bn due to decline in KG D6 gas output; Petchem & Clean energy projects largely on track: O2C EBITDA was largely in line with JMFe at INR 151bn (up 4.7% QoQ but down 10% YoY on a high base) – implied GRM was largely in line with JMFe of USD 9.6/bbl (vs. Spore Dubai GRM of USD 3.1/bbl and vs. ~USD 9.4/bbl implied in 3QFY25); implied petchem margin continues to be weak though marginally higher QoQ. Hence, RIL’s overall O2C EBITDA margin was in line with JMFe at USD 97/tn (vs. USD 95/tn in 3QFY25). Weak global O2C margin was partly offset by higher domestic fuel marketing sales (35% growth in RIL’s retail volume) and favourable ethane cracking. Jio-BP fuel marketing business contributed INR 25bn EBITDA in FY25; implying EBITDA of ~INR 3/ltr (i.e., INR 25bn upon ~8bn ltr volume) assuming RIL had ~5% market share in the domestic auto-fuel retailing business of ~165bnltr. However, E&P segment EBITDA was 2% below JMFe and down 7.9% QoQ at INR 51.2bn in 4QFY25; this was due to ~7% QoQ decline in KG D6 gas output to 26.7mmscmd in 4QFY25 (condensate output was at 19.6kbpd) because of natural decline and maintenance shutdown. Current KG D6 gas output has recovered slightly to ~27.0mmscmd. Separately, the management said the INR 600bn-650bn Petchem expansion project would contribute from FY28; it added that the first line of the Solar PV Module had been commissioned, and Polysilicon to Solar PV module manufacturing capacity of 10GW per annum can be expanded modularly.

* Consolidated capex up QoQ to INR 360bn in 4QFY25 (vs. INR 323bn in 3QFY25); net debt slightly higher by INR 16bn QoQ at INR 1,171bn: RIL’s consolidated 4QFY25 capex was higher QoQ to INR 360bn vs. capex of INR 323bn in 3QFY25 (FY25 capex was INR 1,311bn vs. FY24 capex of INR 1,318bn; FY23 capex was INR 1,418bn ex-spectrum and INR 2,355bn including spectrum). Further, reported net debt was up INR 16bn QoQ at INR 1,171bn at end-4QFY25 (vs. reported net debt of INR 1,155bn at end-3QFY25). Consolidated gross debt at end-4QFY25 was INR 3,475bn (vs. INR 3,504bn at end 3QFY25); while cash and cash equivalents at end 4QFY25 was INR 2,304bn (vs. INR 2,350bn at end 3QFY25).

* Net debt to decline gradually on likely moderation of capex; reiterate BUY as we expect strong 15-20% EPS CAGR over the next 3-5 years driven by both consumer businesses: We have maintained FY26 EBITDA but has cut FY27 EBITDA by 2% to account for slight deferral in petchem project ramp-up to mostly in FY28 (from earlier assumption of significant ramp-up in FY27); however, our TP is largely unchanged at INR 1,580. We reiterate BUY as we expect its net debt to decline gradually because capex will not only moderate (INR 1.2trln-1.4trln p.a. vs. INR 2.3trln in FY23 and INR 1.3trln in FY24) but, importantly, also be fully funded by a gradual increase in internal cash generation. RIL’s guidance on keeping reported net debt to EBITDA below 1x (0.7x at end-FY25) also gives comfort. Moreover, we believe RIL has industry leading capabilities across businesses to drive robust 15-20% EPS CAGR over the next 3-5 years, particularly driven by both consumer businesses with Jio’s ARPU is expected to rise at 11% CAGR over FY24-28 with ARPU being on a structural uptrend given the industry structure, future investment needs, and the need to avoid a duopoly market. Clarity on the potential timeline and valuation of Jio’s listing could be a possible near- to medium-term trigger. At CMP, the stock is trading at FY27E P/E of 17.9x (3-yr avg: 24.7x) and FY27E EV/EBITDA of 9.1x (3-yr avg: 12.6x). Key risks: a) high capex, resulting in rising net debt with limited earnings visibility from new projects; b) weak subs addition and limited ARPU hike; c) muted growth in the retail business; and d) subdued O2C margins due to macro concerns.

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