Reliance Industries Rating: overweight; Tax rate, depreciation hit earnings

RIL’s Ebitda was in line with our estimates, but 550bps higher tax rate and depreciation drove a 10% earnings miss. Shutdown in chemicals and refinery operations did surprise negatively, but was cushioned by slightly higher chemical margins. Telecom and consumer retail performance was in line.

RIL’s Q1FY23 core Ebitda was up ~63% y-o-y and ~22% q-o-q, largely in line with MS/Street estimates, as higher chemical margins negated the lower utilisation rates in the O2C vertical. All other businesses showed steady operational performance. Profit did miss MS estimates by 10% due to: 1) higher tax rate of 29% (normal of ~23%) and 2) higher depreciation due to higher telecom utilisation.

Oil to chemicals (O2C) – Better margins; lower production: O2C Ebitda grew 40% q-o-q and was in line, but production missed estimates due to shutdown of cracker and one refinery unit. Key chemical sales declined 25% q-o-q and shutdown of diesel unit in refinery lowered diesel sales q-o-q. Estimated refining margins stood at $17.1/bbl in Q1FY23, up 63% q-o-q and was in line with estimate. Chemicals Ebitda/ton increased an estimated 3% q-o-q.

Telecom – In line; net subscriber additions: Ebitda was flat q-o-q (in line with our estimate) despite higher average revenue per user (ARPU) as digital Ebitda declined. ARPU rose 5% q-o-q, to `175.7/month, and net subscriber additions turned positive, to 9.7mn. Implied wireless ARPU rose 4% q-o-q, to `168/month, as subscriber mix improved and some of the impact was from tariff hike. Ebitda margins were 50.1% (20bps lower q-o-q). Net subscriber base was 420 mn, growing 2% q-o-q.

Retail – In line, but margin expansion surprised: Revenue growth in the retail segment was flat q-o-q, with 119% rise in footfalls vs pre-Covid levels. RIL added 792 new stores in Q1FY23, similar to last quarter, with 10% growth in area operated (45mn sqft). Core Ebitda (ex-investment income) was up 9% q-o-q with Ebitda margins surprising as they expanded 50bps q-o-q, to 6.7%, as

mix shifted towards electronics and fashion & lifestyle.

Oil & gas – higher ASPs: Ebitda was `27 bn, up 74% q-o-q, led by 59% increase in gas ASPs, to $9.7/mmbtu. Gas production rose slightly, by 7% sequentially, to 19.7mmscmd.

Net debt rose q-o-q, to $7.2 bn (vs last quarter at $4.6 bn), largely due to higher working capital as oil prices and retail sales increased. Capex, at $4 bn, was above our forecasts, as investments in retail remained high.