Digital business did better than expected while retail disappointed; market’s exuberance is misplaced; ‘Hold’ rating maintained
Reliance Industries (RIL) Q1FY21 consolidated Ebitda at Rs 168 bn (-21% y-o-y) and PAT (prior to exceptional gains) at Rs 82 bn (-18% y-o-y) were in line with our estimates. The digital business beat expectations but retail disappointed, while O2C was in line. RIL contained the fall in O2C volumes by 9.2% q-o-q despite the Covid-19 crisis. GRM at $6.3/bbl is significantly higher versus Singapore complex (spread of $7.2/bbl), driven by stringent cost controls and larger internal consumption.
Retail Ebitda fell 47% y-o-y as half of RIL’s stores were closed, especially in the higher-margin fashion and electronics space. Telecom ARPU of Rs 140.3 beat estimates materially (est: Rs 135), driving up Ebitda by 50% y-o-y. In our view, the primary stock triggers—deleveraging, asset monetisation and digital momentum—have played out. We reiterate the recent downgrade to Hold with a TP of Rs 2,105.
Refining, petchem decline sharply, but in line with our estimates: GRM at $6.3/bbl (-22.2% y-o-y) and throughput at 16.6MMT (-5.1% y-o-y) precipitated a sharp y-o-y fall in Ebitda of 25.9% y-o-y to Rs 38.1 bn. Petchem Ebitda at Rs 44 bn slid 49% y-o-y as polyester margins (PX, PTA) plunged as demand fell off. Lower margin on gas cracking caused the fall. KG-D6 gas production start has been delayed to H2FY21, but it shall quickly contribute Rs 100 bn/year to Ebitda (by FY23e).
Strong Jio ARPU offsets shutdown of half of retail stores: RJio turned in an Ebitda of Rs 70 bn (+50% y-o-y), sharply beating estimates due to 7.6% q-o-q ARPU improvement. ARPU gains was largely due to the tariff hikes taken in December 2019. RJIO added 10 mn subscribers during the quarter. Retail Ebitda shrunk 47% y-o-y to Rs 10 bn as shutdown of the electronics and fashion stores was only partially offset by strong grocery growth (up 21% y-o-y).
Outlook: Reiterate Hold being wary of newFAANGled exuberance— We believe RIL’s FAANG-like valuation (particularly Jio’s) is misplaced as O2C and telecom make up 70% of value. Our two-stage reverse-DCF analysis shows the market is baking in high EPS growth, particularly for Jio (35% CAGR sustaining for 10 years). Besides, deleveraging to zero-debt has counterintuitively lifted RIL’s WACC to its high cost of equity (CoE).