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Retail & Telecom businesses drive operating performance

Reliance Industries (RIL)’s consolidated revenue/EBITDA/PAT grew 4%/15%/9% YoY to INR2.2t/INR407b/INR173b in 3QFY24 (6% miss/in line/in line) led by growth across segments. A fall in Brent oil prices led to a revenue miss, while healthy margins in the telecom and retail segments resulted in 190bp YoY margin expansion.

RJio’s revenue/EBITDA rose 2.5% QoQ each (in line) in 3QFY24, led by 2.5% subscriber additions while ARPU was flat QoQ. PAT was up 3% QoQ, in line with the EBITDA growth. Pan-India rollout of 5G was completed as targeted in Dec’23. 

Reliance Retail posted healthy revenue/EBITDA growth of 24%/31% YoY (in line) fueled by 21% area additions. PAT was up 31% YoY, in line with the EBITDA growth.

Standalone EBITDA stood at INR175.6b in 3QFY24 (8% below our estimate) because of lower gas price realization and a lower downstream margin. O2C’s earnings in 4QFY24 may improve sequentially since 3Q earnings were hit by maintenance shutdowns. Over the next 1.5 years, we are building in healthy O2C profitability as: 1) the refining net capacity additions in CY24 are (0.6mnbopd) trailing oil demand growth of 1.2mnbopd (IEA), 2) CY23 was the last year of substantial supply growth (~5%; CY20-24) for olefins, and 3) there are low inventories for oil products and PE/PP globally. Consequently, we believe that re-stocking can lead to a sharp uptick in margins. 

Net debt increased marginally to INR1.19t in 3Q from INR1.18t in 2QFY24. Capex for the quarter narrowed sequentially to INR301b from INR388b in 2Q (INR1.09t in 9MFY24). 

Using SoTP, we value the Refining and Petrochemical segment at 7.5x FY26E EV/EBITDA to arrive at a valuation of INR976/share for Standalone. We ascribe an equity valuation of INR810/sh to RJio and INR1,523/sh to Reliance Retail (factoring in the recent stake sale) as well as INR37/sh towards the new energy business We reiterate our BUY rating with a TP of INR3,130.

RJio – growth driven by subscriber additions (in line)

RJio’s revenue/EBITDA rose 2.5% QoQ each (in line) in 3QFY24, led by 2.5% subscriber additions while ARPU was flat QoQ. PAT was up 3% QoQ, in line with the EBITDA growth. 

It has completed the fastest rollout of 5G services in India as per its target of completion by Dec’23 with 90m 5G subscribers, while Airfiber will be completed by 1HCY24. 

We expect revenue/EBITDA CAGR of 11%/15% over FY24-26, factoring in 5%/ 4% CAGR for subs/ARPU over the same period. The long-term outlook remains intact with market share gains from VIL, tariff hikes, and new growth opportunities such as Jiofiber, Airfiber, and JioBharat along with other digital avenues triggered by the 5G rollout.

Reliance Retail – broad-based growth; grocery outperforms

Reliance Retail’s revenue/EBITDA grew 24%/31% YoY to INR744b/INR63b (in line) with a 50bp YoY margin improvement. Core revenue/EBITDA (excluding Connectivity) jumped 30%/33% YoY according to our calculations. PAT was up 31% YoY, in line with the EBITDA growth. 

The growth was propelled by footprint additions. Reliance Retail added 252 new stores (and closed 128 stores) to reach 18,774 stores (+47% YoY) with a total area of 72.9m (+21% YoY). There was a marginal improvement in revenue/sqft. 

The Grocery business jumped 41% YoY, while Consumer Electronics/Fashion & Lifestyle rose 19%/28% YoY. Digital & New Commerce grew 31% YoY in 3QFY24, increasing its contribution to 19% from 18% in 3QFY23. 

Revenue and EBITDA are likely to register 24% and 28% CAGR, respectively, over FY24-26 (retained estimates) led by accelerated store additions across segments, a recovery in store productivity, and aggressive foray into digital & new commerce.

Standalone – lower gas realization and downstream margins lead to a miss

Revenue came in at INR1,277b (+1% YoY), while EBITDA was at INR175.6b (est. of INR189.9b, +18% YoY) during the quarter. Reported PAT in 3QFY24 was up 19% on a YoY basis. 

Polymer margin contracted with muted demand globally in a well-supplied market. 

EBITDA/mt stood at USD86 (+3% YoY; our est. at USD 102/mt), with production meant for sale at 16.4mmt (+1% YoY). 

Reported PAT was at INR99.2b (est. of INR104.4b, +19% YoY) in 3QFY24. ? Gas price realization for KG-D6 contracted to USD9.66/mmBtu in 3QFY24 from USD11.32/mmBtu in 3QFY23.

Valuation and view

Segment-wise, the Consumer business continues to post double-digit EBITDA growth, with both RJio and Reliance Retail likely to record 15%/28% EBITDA CAGR over FY24-26. The growth would be driven by the retail sector’s footprint additions and new categories, while the telecom business continues to focus on subscriber growth. In O2C, we see refining and petchem segments picking up from the current levels, as net capacity additions for both segments are tapering off on a YoY basis. Moreover, FY25 would see the full benefit from the rampedup volumes at the MJ Field.

We value Reliance Retail’s core business at 35x EV/EBITDA on FY26E and connectivity at 5x to arrive at our valuation of INR1,732. Reliance Retail’s value in RIL share comes to INR1,523/sh (for its 87.9% stake). Our premium valuation multiples capture the opportunity for rapid expansion in its retail business and the aggressive rollouts of the digital platforms.We have built in an FY24/25 capex of INR1.2t/INR900b, modeling INR400b/ INR310b in Telecom, INR550b/INR450b in the Standalone business and the rest in Others, considering RIL’s investments in new-age greener businesses.

Using SoTP, we value the Refining and Petrochemical segment at 7.5x FY26E EV/EBITDA to arrive at a valuation of INR976/share for Standalone. We ascribe an equity valuation of INR810/share to RJio and INR1,523/share to Reliance Retail and INR37/share towards the new energy business We reiterate our BUY rating with a TP of INR3,130.

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