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Steady numbers; capex to decline as 5G rolls out; retain BUY

RIL reported largely in-line earnings (consol EBITDA: Rs410bn; PAT: Rs174bn) in Q2FY24, driven by a beat on our Retail and O2C estimates, while Upstream saw a miss due to MJ1 commissioning costs. Jio remained consistent with better than expected net subscriber additions. Net debt fell 7% QoQ to Rs1.18trn, led by Retail fund-raise and strong OCF. Mgmt. highlighted that capex intensity is expected to decline by FY24-end, on completion of 5G network roll-out. Q2FY24 capex—attributable to 5G rollout and building of the retail eco-system—stood at Rs388bn, down 2% QoQ. We keep FY24-26E earnings largely unchanged. We retain our BUY on RIL on the back of steady earnings outlook and peaking-out of current capex cycle which should entail FCF generation and debt reduction. Valuations are attractive and we maintain Sep-24E TP at Rs2,730/share.

Reliance Industries: Financial Snapshot (Consolidated)

Key Result Highlights: O2C EBITDA grew 7% QoQ, led by better distillate spreads & PVC deltas, feedstock optimization and cheaper ethane. O2C feedstock/sales stood at 20.0mt/17.1mmt, up 2%/down 1% QoQ, while EBITDA/mt rose 4% to USD98. Upstream EBITDA rose 19% QoQ to Rs47.7bn, as KG Basin gas volumes were up 35% QoQ at 28.3mmscmd, amid higher implied opex. Jio clocked strong net subs additions of 11.2mn (vs our est of 9.5mn), while ARPU was in-line at Rs181.7, up 1% QoQ. Jio’s EBITDA rose 2.6% QoQ to Rs140.7bn. Network opex was up 3.1% QoQ to Rs76.1bn. Retail EBITDA rose 13% QoQ to Rs58.3bn, as net store additions stood at 204, while retail area rose 1% QoQ to 71.5mn sqft. Q2 revenue growth was led by Grocery/FashionLifestyle which grew strongly at 33/32% YoY, while Electronics growth was slower at 11%. RIL’s Other Income was up 9% YoY to Rs38.4bn (a 7% beat). RIL sold stake in Retail & raised capital of Rs103.5bn from QIA/KKR during Q2, and of Rs49.7bn from ADIA in Oct-23. RIL completed asset transfer to warehouse InvIT for Rs51.5bn in Oct-23.

Management KTAs: RIL's outlook on the O2C business remains positive, with tight fuel markets, strong domestic demand and limited new-builds. Global downstream chemical margin is expected to stay soft in the near term, while moderation in new supplies from China and demand recovery could help to improve overall margin. Current KG Basin gas output is ~29mmscmd and likely to touch 30mmscmd in coming months, while CBM gas production is expected to be ramped up in Q4FY24. Jio expects 5G pan-India coverage by Dec-23, with 1mn 5G cells deployed across 8k cities/towns in India, as JioFiber scales up and tech stack upgradation continues. Retail momentum is expected to sustain, as Digital/New commerce scales up, amid new launches and channel expansion initiatives.

Valuation: We value RIL on an SOTP basis, with core segments using Sep-25E EV/EBITDA and New Energy/Other segments using EV-IC/EV-sales methodologies. We largely retain our EV/EBITDA multiple for all segments. We adjust RIL’s stake in the Retail business after the recent Rs155bn fund-raise. Key risks: Adverse commodity/currency, B2C competition, delay in monetization of ventures, and policy & new business risks.

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