scorecardresearch

Reliance Industries Rating ‘Hold’; Core businesses aided growth in quarter

Firm is moving in right direction; estimates for FY23-24 up 2%; TP raised to Rs 2,510 on rollover; ‘Hold’ rating maintained

Store additions picked up briskly as RIL added 7% to total store area, similar to what it achieved in FY20.
Retail performed strongly as offline retail returned to normal with 97% of stores being operational; footfall is back to 95% of pre-pandemic levels, buoyed by the festive season

Q3FY22 earnings were largely in line with consensus estimates adjusting for a one-time gain on the sale of shale assets. Ebitda rose c14% q-o-q, 38% y-o-y, to Rs 297 bn driven by growth across all segments. Reported PAT of Rs 185 bn grew 36% but adjusting for a one-time gain, it grew 15% q-o-q. Within segments: (i) Retail performed strongly as offline retail returned to normal with 97% of stores being operational; footfall is back to 95% of pre-pandemic levels, buoyed by the festive season and new products revenue grew 27% q-o-q and Ebitda grew 31% q-o-q. Store additions picked up briskly as RIL added 7% to total store area, similar to what it achieved in FY20.

(ii) Digital services revenue rose 3.3% driven by a 5.6% q-o-q ARPU increase but fell c2% q-o-q due to a decline in subscribers (second consecutive quarter) as non-paying subscribers were churned out. Over the past two quarters, Jio has lost c20% of its subscribers but net of new additions, it is down 4.4% over the same period. However, reported Ebitda grew 6% q-o-q to Rs 95 bn.

(iii) Its O2C business reported Ebitda growth of 6% q-o-q to Rs 135 bn supported by improved refining margins and throughput, which was partly offset by declining petrochemical spreads. (iv) E&P business continued to grow on increased production in the KG basin, benefitting from higher realisation for shale gas.

Investment view: We still like RIL’s business and balance sheet and believe all three of its core businesses – O2C, retail, and digital services – have become self-sustaining and cash-generating, with its retail and digital operations growing strongly. Recent transactions to purchase technology, as well as investment plans for new energy, are likely to kick-start another growth engine but will require investment in the interim.

What to watch out for: We are still waiting for digital businesses (other than telecom) to mature and thus generate revenue. However, the potential listing of this business could unlock value over the medium term, which we expect will happen close to the launch of its 5G operations. In terms of retail, e-commerce continues to pick up pace, although it has yet to reach meaningful scale with most of growth being driven by physical stores. New energy efforts are in their early stages of technological development and are likely to take a few years to achieve scale.

Maintain Hold: We raise our FY23-FY24 estimates by 2% as we incorporate Q3FY22 results, build in a lower telecom subscriber base, and factor in a tariff hike for the telecom segment. We continue to value RIL on a sum-of-the-parts basis which results in a marginal change in TP as we roll forward our current fair valuation to March 2022 to Rs 2,510 (from Rs 2,420). Our TP implies 1.3% upside; thus, we maintain our Hold rating. Key downside risks: Lower O2C margins than we forecast and a slow uptick. Key upside risks: A large investment in retail and break-through technology for new energy initiatives.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.