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O2C, retail drag 1Q performance; telecom stable

JIO IPO, refining / petchem upcycle in FY26-27 are catalysts

* Reliance Industries (RIL)’s 1QFY25 consolidated revenue/EBITDA grew 12%/2% YoY to INR2.3t/INR388b (in-line/5% miss), while PAT dipped 5% YoY to INR151b (9% miss). EBITDA/PAT missed our estimates due to the standalone/retail segments, while all three segments drove revenue growth.

* RJio’s revenue/EBITDA/PAT increased ~2% QoQ each (in line) in 1QFY25, led by 7.9m subscriber additions, while ARPU was flat QoQ. The growth in network operating costs moderated and consequently, led to ~60% incremental EBITDA margin.

* Reliance Retail posted soft revenue growth of 7% YoY (9% miss), while area additions were robust at 15% YoY. Growth was fueled by Grocery and Electronics segments. EBITDA grew 8% YoY (8% miss), offset by higher depreciation, and consequently, PAT was flat during the quarter.

* Standalone EBITDA decreased 29% QoQ to INR143b and came in 20% below our estimates, mainly due to weaker refining GRM. We cut our standalone FY25E EBITDA/PAT by 8%/11% as we adjust for a weaker 1QFY25 performance and moderate GRM/gas price assumptions. Gasoline and Diesel GRMs are down ~USD1.5 and USD0.7 per bbl, respectively, in Jul’24 vs. the 1QFY25 average.

* Consolidated net debt improved sequentially by INR40b to INR1,123b, and capex for the quarter increased sequentially by INR56b to INR288b.

* Structurally, we are bullish on the refining business given globally capacity growth (IEA est. 2023-30: ~3.3mb/d) will lag oil demand growth (~1.0- 1.2mb/d p.a.). In telecom, we are modeling an ARPU CAGR of 12% over FY24-26. In addition, we see the potential IPO for RJio to unlock valuation for the telecom business. We also remain positive on the retail business, where we are modeling 19% revenue/EBITDA CAGR each over FY24-26.

* Using our SoTP method, we value the Refining & Petrochemical segment at 8x FY26E EV/EBITDA to arrive at a valuation of INR1,061/sh for the Standalone business. We ascribe an equity valuation of INR940/sh to RJio and INR1,579/sh to Reliance Retail as well as assign INR89/sh towards the new energy business. Reiterate BUY with a TP of INR3,435.

RJio – steady growth led by subscriber additions (in line)

* RJio’s revenue/EBITDA rose 2.0%/2.3% QoQ (in line) in 1QFY25, led by 1.6% subscriber additions (7.9m additions), while ARPU was flat QoQ at INR181.7. PAT was up 2% QoQ, in line with the EBITDA growth.

* The network's opex growth is currently slowing down following the significant capex rollout. Compared to the 2-3% sequential growth seen in FY24, opex has expanded by 1% QoQ only. The majority of the 5G rollout is complete, and we expect a capex of INR392b/INR356b in FY25/26.

* We broadly maintain our estimates for FY25/FY26, expecting an 18% CAGR in revenue and a 25% CAGR in EBITDA over FY24-FY26. We project 2m monthly net subscriber additions for the next two years (vs. 3.5m monthly additions in FY24) due to the expectation of some SIM consolidation as subscriber churn and MNP are still elevated. We have modeled an ARPU CAGR of 12% over FY24-26E, factoring in the recent tariff hikes and the probability of the next round of tariff hikes in FY26.

Reliance Retail – soft revenue growth; margin sustains

* Reliance Retail posted a soft revenue growth of 7% YoY (9% miss), though area additions were robust at 15% YoY. Revenue per sqft declined 8% YoY. EBITDA growth of 8% YoY (8% miss) was offset by higher depreciation, and hence, PAT was flat YoY for the quarter.

* The growth was propelled by the Grocery and Electronics segments, while the Fashion & Lifestyle segment was tepid. Overall footfalls grew 19% YoY to 296m across formats, and the customer base jumped 18% YoY to 316m. However, the number of transactions moderated to 334m (+6% YoY).

* We cut our revenue estimates by 3-5% for FY25/26 owing to the soft growth. We expect revenue and EBITDA to register 19% CAGR each over FY24-26 fueled by accelerated store additions across segments, a recovery in store productivity, and an aggressive foray into digital & new commerce.

Standalone: Miss on EBITDA due to weak product cracks; softer O&G performance QoQ

* Revenue stood at INR1,299b (+6% YoY). EBITDA came in at INR143b (est. INR180b; -18% YoY).

* EBITDA/mt stood at ~USD62 (-39% YoY; our est. USD91.8/mt) amid weak Gasoline, PE, and PP cracks, which were down 30%/17%/16% YoY. Production meant for sale stood at 17.7mmt (+3% YoY).

* Reported PAT was INR76b (est. of INR101b, -21% YoY).

* Gas price realization for KG-D6 gas declined to USD9.27/mmBtu in 1QFY25 from USD10.8/mmBtu in 1QFY24. Oil & Gas exploration EBITDA increased 30% YoY to INR52b, but was down 7% QoQ.

* Key macro performance highlights: The global oil demand in 1QFY25 rose 0.7mb/d YoY to 102.9mb/d, with strong demand originating mainly from Asia.

* The global refinery throughput was higher by 0.3mb/d YoY at 81.6mb/d in 1Q.

* Crude oil benchmarks improved YoY as the demand trend remained positive amid lower OPEC+ supply and strong demand from emerging markets.

Valuation and view

* Segment-wise, the consumer business continues to post double-digit EBITDA growth, with both RJio and Reliance Retail likely to record 25% and 19% EBITDA CAGR over FY24-26, respectively. The growth would be driven by footprint additions, new categories in the retail sector, the focused approach to subscriber growth, and the tariff hikes in the telecom business. 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 witness the full benefit of the ramped-up volumes at the MJ Field.

* We value Reliance Retail’s core business at 45x EV/EBITDA on FY26E and connectivity at 5x to arrive at a company value of INR12.2t (INR1,797 per share). Reliance Retail’s value in RIL share comes to INR1,579/sh (for its 87.9% stake). Our premium valuation multiples capture the opportunity for a rapid expansion in its retail business and the aggressive rollout of digital platforms.

* For RJio, we assign a 13x FY26E EV/EBITDA to arrive at our valuation of INR9.6t. Factoring in the 34% stake sale, RJio’s value in RIL comes to INR940/share (for its 66% stake). The higher multiple captures: a) its market leadership and market share gains, b) growth in the wireline (JioFiber and JioAirFiber) business, and c) opportunities in other digital businesses.

* Overall, we remain positive in both the Refining and Petrochemical segments. Global oil demand for CY24 is likely to be at ~103mb/d (up 1mb/d YoY). Gasoil cracks are anticipated to remain firm due to the strength in jet fuel demand and the limited availability of heavy crude.

* While global downstream chemical markets remain well-supplied in the near term, we note that capacity growth is tapering off and has passed its peak for key products such as PE, PP, and PX.

* We model a capex of INR650b for FY25 and FY26 each in the Standalone business, considering RIL’s investments in new-age greener businesses (such as solar energy, and a hydrogen ecosystem in India).

* Its consolidated gross debt declined INR197b to INR3.05t in 1QFY25, and with cash & cash equivalents of INR1.93t, the net debt stood at INR1.12t (according to the management).

* We maintain our capex estimates at INR1.2t each year for FY25/26, modeling INR392b/INR356b in Telecom, INR650b each year in the Standalone business, INR110b/INR107b in Retail, and the rest in Others, considering RIL’s investments in the new-age greener businesses.

* Using our SoTP method, we value the Refining & Petrochemical segment at 8x FY26E EV/EBITDA to arrive at a valuation of INR1,061/sh for the Standalone business. We ascribe an equity valuation of INR940/sh to RJio and INR1,579/sh to Reliance Retail as well as assign INR89/sh towards the new energy business. Reiterate BUY with a TP of INR3,435

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