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Standalone gains; Consumer on a steady path

* Reliance Industries (RIL)’s 2QFY24 consolidated revenue grew 1% YoY/12% QoQ to INR2,319b (in line). EBITDA reported a strong 31% YoY growth to INR410b (8% beat), aided by sustained performance in the O2C segment, better gas price realization, and steady EBITDA growth of 13%/32% YoY in RJio/Retail during the quarter. Consequently, PAT grew 27% YoY to INR174b (5% beat).

* RJio’s revenue/EBITDA grew 3% QoQ each (in line), fueled by 2.5% subscriber additions and marginal increase in ARPU. This flowed into the PAT, which rose 4% QoQ to INR51b (in-line). However, FCF (post-interest) turned negative to -INR19b, due to the continued high capex (INR190b in 1HFY24) and interest costs (INR76b) in 2QFY24.

* Reliance Retail posted a healthy revenue/EBITDA growth of ~19%/32% YoY (in line) buoyed by 41% YoY footfall growth and 31% YoY footprint additions. Higher depreciation and finance cost led to PAT growth of 21% YoY to INR27.9b.

* Standalone 2QFY24 EBITDA at INR192b (+14% vs. our estimate) was fueled by strong refining/PVC cracks and a rise in gas volumes. O2C’s earnings in 3QFY24 may be tempered by plant shutdowns and weak gasoline margin. Over the next 1.5 years, we are building in healthy O2C profitability amid: 1) refining net capacity additions in CY24 (0.6mnbopd) are trailing oil demand growth of 0.9mnbopd (IEA), 2) CY23 is the last year of substantial supply growth (~5%; CY20-24) for olefins, and 3) low inventories for oil products and PE/PP globally. Consequently, we believe re-stocking can lead to a sharp uptick in margins.

* Net debt improved sequentially to INR1,177.3b in 2Q vs. INR 1,266.2b in 1Q. The cash and cash equivalents included INR103.5b towards capital raise in Reliance Retail. Capex for the quarter narrowed a bit sequentially to INR388.2b vs. INR396.5b in 1QFY24 (INR444.1b in 4QFY23).

* Using SOTP, we value the Refining and Petrochemical segments at 7.5x EV/EBITDA, arriving at a valuation of INR878/share for the standalone business. We ascribe an equity valuation of INR760/share to RJio and INR1,353/share to Reliance Retail, factoring in the recent stake sale. Our TP is adjusted for JFS valuation. We reiterate our BUY rating with a TP of INR2,760.

RJio – growth driven by (in-line) subscriber additions

* RJio’s revenue/EBITDA grew 3% QoQ each (in line), fueled by 2.5% subscriber additions and marginal increase in ARPU. This flowed into the PAT, which rose 4% QoQ to INR51b (in-line).

* The company is aggressively rolling out 5G, having deployed over 150k sites with 1m+ 5G cells and 85% of the overall 5G capacity in the country. RJio remains on track to complete the pan-India rollout by Dec’23. We marginally revise our FY24E/25E capex to INR400b/INR312b

* We expect its revenue/EBITDA CAGR at 11%/15% over FY23-25 factoring in 9%/3% CAGR for subs/ARPU over the same period. RJio’s long-term outlook remains intact underpinned by market share gains from VIL, tariff hikes, and new growth opportunities such as Jiofiber, Airfiber, and JioBharat along with other digital avenues triggered by 5G rollout.

Reliance Retail – steady growth as expected

Reliance Retail’s revenue/EBITDA surged 19.5%/32.2% YoY to INR689b/INR58b (in line/ 5% beat) with 80bp YoY margin improvement. Core revenue/EBITDA (excluding Connectivity) jumped 24%/34% YoY as per our working. Higher depreciation and finance cost led to PAT growth of 21% YoY to INR27.9b.

* The growth lagged footprint additions. Reliance Retail reported 204 net store additions to 18,650 stores (+45.7% YoY) with a total area of 71.5m (+31.2% YoY).

* The Grocery business jumped 33% YoY, while Consumer Electronics/Fashion & Lifestyle rose 11%/32% YoY. Digital & New Commerce grew 39% YoY in 2QFY24, increasing its contribution to 19% from 18% in 2QFY23.

* Reliance Retail completed the transfer of assets to the warehouse InvIT entity for a total consideration of INR51.5b on 25th Oct’23. It completed an equity fund raise of INR153.1b in the current round from global marquee investors such as ADIA, QIC and KKR, thereby diluting ~2% stake.

* Standalone revenue and EBITDA are likely to report a 22% and 30% CAGR, respectively, over FY23-25 (maintained estimates) fueled by accelerated store additions across segments, a recovery in store productivity, and aggressive foray into digital & new commerce.

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