Reliance Industries “Hold” rating; Core businesses supported growth in the quarter


The company is moving in the right direction; FY23-24 estimates up 2%; TP increased to Rs 2,510 during rollover; The “Hold” note is maintained

Q3FY22 earnings were broadly in line with consensus estimates taking into account a one-time gain on the sale of shale assets. Ebitda increased by around 14% year-on-year, 38% year-on-year, to 297 billion rupees, thanks to growth in all segments. The reported PAT of Rs 185 billion was up 36% but adjusting for a one-time gain it was up 15% qoq. Within the segments: (i) retail delivered strong performance, with offline retail returning to normal with 97% of stores operational; footfall returned to 95% of pre-pandemic levels, buoyed by the holiday season and new product revenue increased 27% YoY and Ebitda increased 31% year-on-year. Store additions grew rapidly, with RIL adding 7% to total store square footage, which is similar to what it achieved in fiscal 2020.

(ii) Digital Services revenue increased 3.3% driven by an ARPU increase of 5.6% QoQ, but fell approximately 2% QoQ due to a drop in the number of subscribers (second consecutive quarter) due to the influx of non-paying subscribers. Over the past two quarters, Jio has lost around 20% of its subscribers, but net of new additions, it’s down 4.4% over the same period. However, reported Ebitda increased 6% year-on-year to Rs 95 billion.

(iii) Its O2C business recorded Ebitda growth of 6% QoQ to Rs 135 billion, supported by improving refining and throughput margins, which was partly offset by lower spreads petrochemicals. (iv) E&P activity continued to grow thanks to increased production in the KG basin, benefiting from higher realization for shale gas.

Investment View: We continue to like RIL’s business and balance sheet and believe that its three core businesses – O2C, retail and digital services – have become self-sustaining and cash-generating, with strong growth in its retail operations. retail and digital. Recent technology purchase deals, as well as new energy investment plans, should kick-start another growth engine, but will require investment in the meantime.

What to watch out for: We are still waiting for digital businesses (non-telecom) to mature and generate revenue as a result. However, the potential listing of this company could unlock value in the medium term, which we believe will happen as it nears the launch of its 5G operations. In terms of retail, e-commerce continues to accelerate, although it has yet to reach significant scale, with most of the growth being driven by brick-and-mortar stores. New energy efforts are in their early stages of technological development and will likely take a few years to reach scale.

Maintaining the Hold: We are increasing our FY23 and FY24 estimates by 2% as we incorporate FY22 third-quarter results, factor in a weaker telecom subscriber base, and factor in a price hike for the telecommunications segment. We continue to value RIL on a sum-of-the-parts basis, resulting in a marginal change in TP as we advance our current fair valuation to March 2022 at Rs 2,510 (from Rs 2,420). Our TP implies a 1.3% upside; thus, we maintain our Hold rating. Main downside risks: O2C margins lower than our forecasts and slow upside. Key upside risks: Significant investment in retail and cutting-edge technology for new energy initiatives.

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