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Soft start to FY26 due to weaker O2C and retail

* Reliance Industries’ (RIL) 1QFY26 consolidated EBITDA declined 2% QoQ (+11% YoY) to INR429b (5% miss), due to weaker performance in Retail and O2C.

* Reliance Retail’s (RR) operational EBITDA came in ~7% below our estimate, due to weaker-than-expected revenue growth (+11% YoY, vs. our est. of ~16%).

* RJio EBITDA rose ~5% QoQ (2% beat), led by lower costs and high incremental EBITDA margins (97%). RIL’s digital EBITDA grew 6% QoQ (2% beat).

* Consol. O2C EBITDA declined 4% QoQ (8% miss), as higher retail fuel margins and product cracks were offset by lower volumes due to a planned shutdown.

* Consol. E&P EBITDA declined 3% QoQ (-4% YoY, 3% beat) due to lower volume and reduction in the ceiling price.

* Attributable PAT was up ~35% YoY, boosted by profit from sale of stake in Asian Paints (~INR89b). Adjusted for the same, PAT declined 7% QoQ to INR181b (+19% YoY) and was 10% below our estimate, due to EBITDA miss and higher interest costs (impact of interest costs for 5G spectrum in RJio).

* 1QFY26 capex declined ~17% QoQ to INR299b (up ~4% YoY).

* Despite gains from Asian Paints stake sale and relatively lower capex, reported consol. net debt increased sequentially by INR5b to INR1,175b as RIL repaid certain creditors for capex.

* We cut our FY26-27E EBITDA by 1-2% and PAT by 4% each due to a broadbased earnings cut. While 1Q was soft, we remain sanguine on RIL’s growth prospects across segments and build in a CAGR of ~11% in EBITDA/PAT over FY25-28E.

* Using the SoTP method, we value the O2C/E&P segments at 7.5x/5x Sep’27E EV/EBITDA to arrive at an enterprise value of INR407/sh for the standalone business. We ascribe an equity valuation of INR585/sh and INR605/sh to RIL’s stake in JPL and RRVL, respectively. We assign INR110/sh (~INR1.5t equity value) to the New Energy business and INR26/sh to RIL’s stake in JioStar. Reiterate BUY with a revised TP of INR1,700 (earlier INR1,685).

Reliance Retail: Weaker-than-expected growth drives ~7% EBITDA miss

* After strong ~16% YoY revenue growth in 4QFY25, RR’s net revenue growth was softer at 11% YoY (5% miss) due to the impact of an early monsoon, ongoing rationalization (retail area down 5% YoY) and lower device sales.

* RR continued to rationalize its footprint with net store addition of 252 (338 additions and 136 closures). Net retail area grew by a modest 0.2m QoQ to 77.4m sqft (-5% YoY).

* Operational EBITDA grew ~11% YoY to INR60b (7% miss) as margins remained stable YoY at 8.2% (20bp miss) due to rationalization-related costs.

* RR’s quick hyperlocal delivery service on JioMart scaled to 4,290 pincodes across 1,000+ cities, which led to a 175% YoY increase in daily orders.

* Reliance Consumer Brands delivered INR44b revenue (2x YoY), with Campa gaining double-digit market share in key markets.

* We cut our FY26-27 revenue and EBITDA estimates by ~2-4% and now build in a CAGR of 14%-15% in revenue/EBITDA over FY25-28E. An acceleration in retail revenue growth remains the key trigger for RIL’s stock price.

RJio: Sharp margin expansion leads to beat; FWA ramps up

* RJio’s standalone revenue grew ~3% QoQ (+17% YoY), driven by 1% QoQ ARPU growth and recovery in subscriber net adds.

* Overall subscriber net adds came in at ~10m (vs. our estimate of ~9.5m), with its 5G user base increasing to 213m (vs. 190m QoQ).

* Jio AirFiber ramped up to ~7.4m subscribers (vs. 5.6m QoQ) to become the largest FWA service globally. RJio reached ~20m Home broadband connections.

* Blended ARPU inched up ~1% QoQ (and ~15% YoY) to INR209/month (vs. our estimate of INR210), led by one extra day and higher consumption in 1QFY26.

* EBITDA grew ~5% QoQ (+20% YoY) to INR167b (2% beat), driven by lower network opex and other key costs.

* EBITDA margin expanded ~125bp QoQ to 54% (~120bp beat), with incremental EBITDA margin rising to ~97% (from 53% QoQ; higher than our estimate of ~54%).

* Our FY26 estimates are broadly unchanged. We cut our FY27E revenue/EBITDA by 3% each due to lower ARPU translation for FWA subs, while FY27E PAT is cut by ~7% on account of higher interest and D&A on 5G spectrum.

* We continue to build in the next round of tariff hikes (~15% or INR50/month on the base pack) in Dec’25. We expect FY25-28E revenue/EBITDA CAGR of ~16%/19% for RJio, driven by tariff hike flow-through and FWA ramp-up. A delay in implementing the tariff hike could pose downside risks to our estimates.

Standalone: EBITDA miss; reported PAT boosted by extraordinary gain

* Revenue stood at INR1,163b (-10% YoY). EBITDA came in at INR132b (est. INR156b; -8% YoY).

* O2C: QoQ EBITDA was impacted by planned maintenance (3.5% QoQ decline in throughput), higher feedstock costs, and increased freight expenses. However, YoY EBITDA improvement was driven by strong transportation fuel cracks, improvement in polymer and elastomer deltas and strong domestic fuel placement (~2000 retail outlets; MS/HSD marketing volumes up 39%/34%). Ethane cracking economics continue to be more favorable than naphtha, despite the rise in ethane prices YoY.

* E&P: QoQ decline in EBITDA was driven by lower oil & gas realization at both KGD6 & CBM. However, RIL’s share in production rose marginally QoQ at both KGD6 and CBM. On a YoY basis, 8% decline in KGD6 volumes was partially offset by improved gas price realization. Further, a sharp 21.7% YoY uptick in production from CBM was countered by 15% YoY lower CBM gas price realization.

* Reported PAT of INR179b was boosted by the sale of Asian Paints stake (INR89b) and lower-than-expected interest expenses and taxes.

Key macro performance highlights:

* Global oil demand in 1QFY26 rose by 0.6mb/d YoY to 103.4mb/d.

* The global refinery operating rate was up 10bp YoY at 78.7% in 1Q

* Crude oil benchmarks declined 20% YoY, led by concerns about US tariffs and accelerated unwinding of OPEC+ production cuts

Near-term dynamics:

* RIL expects auto fuel cracks to remain supported by the US driving season and lower global inventory levels. Further, an expected uptick in seasonal air travel should support jet fuel demand and cracks.

* Refining margins would be supported by significant refining capacity closures anticipated in Europe and North America during CY25/26, resulting in limited net capacity additions.

Valuation and view

* We reduce our FY26-27E EBITDA by 1-2% and PAT by 4% each due to broad-based earnings cuts. While 1Q was soft, we remain sanguine on RIL’s growth prospects across segments.

* We expect RJio to remain the biggest growth driver with 19% EBITDA CAGR over FY25-28E, driven by one more tariff hike, market share gains in wireless, and continued ramp-up of the Homes and Enterprise offerings.

* Given recent rationalization, a low base and a scale-up of quick deliveries on JioMart and AJio, we expect growth to recover sharply in RR and build in ~14-15% CAGR in revenue/EBITDA over FY25-28E.

* After a subdued FY25, we expect earnings to recover in the O2C segment, driven by improvement in refining margins. However, our FY28E consolidated EBITDA for O2C and E&P is ~4% lower than FY24 levels.

* Overall, we build in a CAGR of ~11% in consolidated EBITDA and PAT over FY25- 27, driven by a double-digit EBITDA CAGR in RJio and RR and a recovery in O2C.

* We model an annual consolidated capex of INR1.3t for RIL over FY25-28E, as the moderation in RJio capex is likely to be offset by higher capex in New Energy forays. However, we believe the peak of capex is behind, which should lead to healthy FCF generation (~INR1t over FY25-28E) and a decline in consol. net debt.

* For Reliance Retail, we ascribe a blended EV/EBITDA multiple of 30x (32x for core retail and ~6x for connectivity) to arrive at an EV of ~INR10.1t for RRVL and an attributable value of INR605/share (earlier INR600/share) for RIL’s stake in RRVL. Sustained recovery in retail revenue remains the key for RIL’s re-rating.

* We value RJio based on DCF – implied 13.3x Sep’27E EV/EBITDA to arrive at our enterprise valuation of INR12.5t (USD147b) and assign ~USD9b valuation to other offerings under JPL. Factoring in net debt and the 33.5% minority stake, the attributable value for RIL comes to INR585/share (earlier INR580/share).

* Using the SoTP method, we value the O2C/E&P segments at 7.5x/5.0x Sep’27E EV/EBITDA to arrive at an enterprise value of INR5.5t (or ~INR407/sh) for the standalone business. We ascribe an equity valuation of INR585/sh and INR605/sh to RIL’s stake in JPL and RRVL, respectively. We assign INR110/sh (~INR1.5t equity value) to the New Energy business and INR26/sh to RIL’s stake in JioStar. We reiterate our BUY rating with a revised TP of INR1,700 (earlier INR1,685).

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