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O2C stands tough against headwinds while Consumer and upstream business continue strong performance

Reliance Industries (RIL) delivered a steady Q2FY25, with consolidated revenue at Rs 2,315bn, flat YoY and QoQ. EBITDA stood at Rs 390.6bn (-4.7% YoY, +0.8% QoQ), while PAT rose sequentially to Rs 193.2bn (-2.8% YoY, +10.8% QoQ) on lower-thanexpected depreciation and taxes. The O2C segment showed resilience despite declining fuel cracks and weak petchem margins (GRM of ~USD9.6/bbl). Upstream remained strong, with KGD6 contributing over 30% of India’s gas production. Retail sales were stable at Rs 763.3bn, was supported by digital commerce. Digital services saw a 14.7% YoY EBITDA growth, driven by a tariff hike, which pushed Jio’s ARPU to Rs 195.1 while resulting into loss of subscribers of 10.9mn to 478.8mn. Net debt increased sequentially to Rs 1,164.4bn due to elevated capex of Rs 340.2bn. RIL’s capex over FY24-25e is expected to remain elevated given the ongoing investment in Telecom (5G), expansion of retail infrastructure and new energy business. Maintain BUY with a TP of Rs 3,500/shr.

Result Highlights

* Performance: The consolidated revenue at Rs 2,315bn was flat YoY & QoQ. While EBITDA/PAT at Rs 390.6/193.2bn was down 4.7/2.8% YoY and up 0.8%/10.8% QoQ. The O2C performance was resilient despite declining product cracks coupled with deteriorating petchem margins, assumed GRM of ~USD 9.6/bbl.

*  The O2C performance persisted to face headwinds in Q2FY25. Global oil demand increased in the quarter by 0.8 mb/d YoY. However, there was weakness in transportation fuel cracks which were down ~50% YoY. The reported EBITDA at Rs 124.1bn was down 23.8% YoY and 5.2% QoQ. The YoY decline is a result of ~50% dip in fuel cracks and 9-24% fall in downstream chemical deltas across the industry. While the QoQ drag was witnessed due to a correction across transportation fuel cracks on higher refinery runs in the US which led to increase global supply and subpar demand and weak PE (-8%) and PVC (-6%) deltas despite favorable ethane cracks.

*  The domestic upstream segment remained firm witnessing flattish production growth for KGD6 and marginal improvement in CBM partially offsetting lower gas prices. While KGD6 continues to contribute >30% of India’s gas production, it marginally declined to 28.5mmscmd and 20,832bbls/day of oil.

* Consumer segment: Retail sales were flat at Rs 763.3bn, focus remained on Digital commerce and Consumer business, improving operating efficiencies on stronger footfalls and strengthened digital channels. EBITDA for Retail/Digital was at Rs 58.6/161.4bn up 0.5/14.7% YoY and 3.3/8% QoQ. The strong jump in Telecom EBITDA is attributed to the tariff hikes which increased the ARPU to Rs 195.1 meanwhile cannibalizing subscribers down by 10.9mn (to 478.8mn subs), traction in FTTH supported the overall growth as well.

* The reported net debt stood at Rs 1,164.4bn, reduced by Rs 13bn YoY and was up by Rs 41bn QoQ on account of accelerated capex towards 5G roll-out, expansion of retail infrastructure and new energy business. The capex at Rs 340.2bn is higher than last qtr’s Rs 287.9bn

Valuation

We value the stock on SOTP basis at a TP of Rs 3,500/share. The O2C contributes Rs684, upstream Rs173, and Jio platforms and Retail at Rs 884/1698. New Energy piece adds Rs200 and a reduction of Rs138 of Net debt.

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