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Strong O2C, giga factories to be key catalysts in FY25

* Singapore refining margin (SG GRM) remained robust at ~USD8.3/bbl in Feb’24, while key petchem spreads over Naphtha too picked up MoM in Feb’24. FY25 will witness Reliance Industries (RELIANCE IN) commence phase-wise operations from its PV and battery storage facilities, which we believe can be a key catalyst for the stock in 1HFY25.

* For Reliance Jio Infocomm Ltd. (RJio), we build in a CAGR of 11%/15% in revenue/EBITDA over FY24-26, factoring in a 5%/4% CAGR for subs/ARPU over the same period. The long-term outlook remains intact for RJio, aided by market share gains from VIL, tariff hikes, new growth opportunities (such as Jiofiber, Airfiber, and JioBharat), and other digital avenues triggered by the 5G rollout.

* Reliance Retail is expected to clock a CAGR of 24%/29% in revenue/EBITDA over FY24-26, led by accelerated store additions across segments, a recovery in store productivity, and an aggressive foray into digital and new commerce.

* We maintain our BUY rating on RIL, highlighting consistent strength in refining margins and ongoing improvements in petchem spreads for the O2C business.

Robust refining GRMs in Feb’24; petchem also improving

* In Feb’24, SG GRM averaged USD8.3/bbl, up from Jan’24 average of USD7.7/bbl. Gasoline margin rose 23% MoM in Feb’24, while diesel margin was at USD19.2/bbl (up 15% MoM).

* PE, PP and PX margins over naphtha in Feb’24 were up ~12%/14%/16% MoM at USD422/366/511 per mt respectively.

* We note that RIL’s O2C earnings in 3QFY24 were impacted by a scheduled shutdown, and accordingly its 4QFY24 O2C earnings should see the full impact of higher volumes as well as improving spreads.

O2C earnings driven by strong refining; petchem bottoming out

* In the FY23-26 period, we build in a 10% CAGR in standalone EBITDA, driven by higher volumes (no major shutdowns like in FY24), strong refining margin, and a moderate expansion in petrochemical spreads, especially in FY26.

* We had highlighted previously in our report (Can petrochemicals surprise in 2HFY25-26?) that petrochemical capacity additions in the Asia-Pacific and Middle East regions are coming off sharply in CY24, which should alleviate over-supply concerns and lead to spreads bottoming out.

* Strong O2C earnings should result in robust FCF generation at the standalone level, which in our estimates rises from INR49bn in FY24 to INR359bn in FY26, thus providing support to the deleveraging argument

New energy to witness start of PV and battery storage facilities in FY25

* FY25 will witness RIL commence operations in phases at its solar PV giga factory and production of battery packs. While there is no “external revenue” for now, RIL should witness energy savings as it will replace conventional power with renewable energy from FY26. Over the medium term, energy costs may decline by ~30-40% (FY23 standalone utility expenditure: INR235b).

* RIL expects to scale up its 10GW PV factory to 20GW by CY26. The energy storage giga factory will initially have a 5GWh annual cell-to-pack manufacturing facility, which will ramp up to 50GWh by CY27.

* Meanwhile, policy support tailwinds for the renewable sector continue as the central government has increased budgetary allocations to solar and hydrogen by 110% and 102%, respectively.

Valuation and view

* We value Reliance Retail’s core business at ~35x EV/EBITDA on FY26E and connectivity at ~5x to arrive at our valuation of INR1,759. Reliance Retail’s value in RIL share is INR1,547/share (for its 87.9% stake). Our premium valuation multiples capture the opportunity for the rapid expansion of RIL’s retail business and the aggressive rollout of digital platforms.

* For RJio, we have broadly kept our estimates unchanged for FY25/FY26, factoring in a CAGR of 11%/15% in revenue/EBITDA during FY24-26. The business is valued at an EV/EBITDA multiple of 12x on FY26E EBITDA. Potential tariff hikes, market share gains from VIL, and opportunities in digital offer an option value of INR130, thereby arriving at a valuation of INR889/share (adjusted for its 66% stake).

* According to IEA estimates, global oil demand growth is projected to remain strong, led by transportation fuels. The global downstream chemical markets are likely to remain well-supplied in the near term. LNG demand remains stagnant as a milder winter in Northeast Asia and Europe has resulted in a lower-than-expected depletion in inventory.

* Using SoTP, we value the standalone business at 7.5x Dec’25E EV/EBITDA to arrive at a valuation of INR955/share. We ascribe an equity valuation of INR889/share to RJio and INR1,547/share to Reliance Retail (factoring in the recent stake sale) as well as INR37/share to the new energy business. We reiterate our BUY rating with a TP of INR3,210.

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