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Reliance Industries Ltd>
  • CMP : 2,531.0 Chg : -3.0 (-0.12%)
  • Target : 3,050.0 (16.37%)
  • Target Period : 12-18 Month

09 May 2022

Gearing up for accelerated growth…

About The Stock

Reliance Industries (RIL) is one of India’s biggest conglomerates with a presence in oil refining & marketing and petrochemicals, oil & gas exploration, retail, digital services and media, etc, making it a well-diversified business entity.

  • At the EBITDA level in FY22, O2C and oil & gas contributed 49% while retail, digital and others contributed 10%, 34% and 7%, respectively

RIL’s results were below estimates on the profitability front on account of weaker-than-expected oil-to-chemicals (O2C) earnings.

  • Revenue was up 36.8% YoY to ₹ 211887 crore as all segments reported revenue growth. It grew 10.8% QoQ led by O2C and digital service
  • EBITDA was at ₹ 31366 crore, up 34.3% YoY, 5.6% QoQ. EBITDA growth YoY was driven by O2C (up 24.8% YoY) and digital service (up 25.3% YoY) mainly on account of higher refining earnings in O2C coupled with tariff hike undertaken in December 2021
  • Subsequently, PAT was at ₹ 16203 crore, up 22.5% YoY. PAT declined 12.6% QoQ owing to lower other income and exceptional gain of ₹ 2836 crore reported in Q3FY22
What should Investors do?

Long term prospects and dominant standing of RIL in each of its product & service portfolio provides comfort for long term value creation. RIL’s consumer business will be the growth driver, going ahead. The company has a strong balance sheet post fund raising while its traditional business will generate healthy cash flows owing to favourable refining scenario in the near term.

We maintain our BUY rating on the stock

Target Price Valuation

We value RIL at ₹ 3050 on an SoTP basis

Key Triggers for future price performance
  • Increment value accretion from the ‘digital ecosystem’ that will be captured at the Jio Platforms (JPL) level
  • Steady FCF generation in the retail segment would enable the company to maintain debt at lower levels and improve its ability to invest in future inorganic opportunities
  • Healthy cash flow in O2C segment is expected in near term owing to higher product cracks and will enable RIL to invest in new energy verticals
New Stock Ideas

Apart from RIL, in our oil & gas coverage we also like Gail.

  • Gail is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value
  • BUY with target price of ₹ 180

Key Financial Summary

Particulars FY19 FY20 FY21 5 Year CAGR(FY16-FY21) FY22E FY23E FY24E 3 Year CAGR (FY21-FY24E)
Revenue (| crore) 623,400.0 658,866.0 539,238.0 12.9 792,756.0 973,187.2 1,003,435.3 23.0
EBITDA (| crore) 83,918.0 88,709.0 80,737.0 14.1 110,460.0 158,299.1 167,127.8 27.4
PAT (| crore) 39,837.0 39,354.0 49,128.0 10.6 60,705.0 87,042.7 88,574.4 21.7
EPS (|) 67.2 62.1 76.2 - 89.7 128.7 130.9 -
P/E (x) 39.0 42.2 34.4 - 29.2 20.4 20.0 -
P/BV (x) 4.0 3.7 2.4 - 2.2 2.0 1.8 -
RoCE (%) 8.9 8.1 5.5 - 7.7 11.5 11.4 -
RoE (%) 10.3 8.9 7.7 - 8.5 11.0 10.4 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Segmental details

Reliance Jio

RJio’s quarterly print was a mixed bag. While SIM consolidation led third consecutive quarter of net subscriber decline (more than expected at 10.9 mn), positive surprise was on higher ARPU growth (also a function of sim consolidation, where low quality subs churn might have been seen) and modest beat at EBITDA levels owing to higher topline. ARPU saw growth of 10.6% QoQ at | 167.6 (our expectations | 164). The revenues and EBITDA was at | 20901 crore, | 10510 crore up by 8%, 10.5% QoQ, respectively. Margins were at 50.3%, up 110 bps QoQ and higher than our estimates of 50%, owing to tad higher topline. PAT was at | 4173 crore, up 15.4% QoQ, tad lower than expected (our expectations | 4245 crore), owing to higher than anticipated interest costs. We highlight that lower interest expenses were expected post repayment of ~| 30791 of deferred spectrum liabilities in December/January and subsequent refinance at lower costs (the company had guided for | 1200 crore of interest costs saving annually). However, the interest cost benefit was not seen during the quarter.

  • On KPI front, key takeaways were:
    • Subscribers: Overall The overall subscriber base (including fibre and enterprise) was at 421 mn, down 10.9 mn QoQ (vs. our expectations of 5 mn sub loss). On the fibre front, the overall sub base was at 5.3 mn, up 0.7 mn QoQ. While the gross addition remained healthy, sim consolidation led to net wireless customer decline of 11.5 million
    • ARPU: Given the SIM consolidation (with improved subscriber mix) and impact of tariff hike undertaken in December (~20-25% hike in prepaid segment), ARPU saw growth of 10.6% QoQ at | 167.6 (our expectations | 164)
    • Data/Voice usage: Total minutes grew 5% QoQ to 1,207 bn, and data usage was up by 5% QoQ to 24610 bn GB. The company also attributed the improvement in customer metrics to SIM consolidation
    • Outlook: The company has indicated that SIM consolidation is abating now as tariff hike impact is absorbed. Over the next quarter residual impact of tariff hike will flow through ARPU. We have marginally tweaked the earnings estimates and we remain constructive on the company. We continue to believe that Jio’s digital ecosystem lends it a competitive advantage in the overall communication space, thereby providing superior legs of growth and valuation pegging

Reliance Retail

Despite Covid led restrictions in January, Reliance Retail reported one of its best quarterly performance in Q4FY22 with revenues surpassing even festive quarter. Footfalls normalised in Feb, whereas March exceeded pre-Covid sales. Overall footfall recovery in Q4FY22 was at 104% of pre-Covid levels (vs. 95% in Q3FY22). The company added 793 new stores with overall stores crossing 15000 benchmark (added ~7 new stores daily in FY22). Revenue for the quarter grew 23% YoY (0.5% QoQ) to | 58019 crore (I-direct estimate: | 56127 crore) with core retail revenue (exc. connectivity sales) increasing by 25% YoY (down 3% QoQ). Management during the call highlighted that demand was robust across all consumption categories (double digit growth) with fashion and electronics segment outperforming. On the profitability font, EBITDA margins (excluding other income) declined by 40 bps YoY to 6.2% (I-direct estimate: 6.5%). Absolute EBITDA grew 16% YoY to | 3584 crore). Digital commerce orders (up 2x YoY) and merchant partnerships (up 4x YoY) continue to scale new highs (19% to sales).

FY22 was a landmark year for Reliance Retail with sales inching nearly at | 200000 crore (| 199707 crore, up 27% YoY). Company added one of its highest number of stores (2500+) in FY22 with coverage of 41.1 million square feet, which is well ahead of any other Indian player. EBITDA for FY22 (excluding other income) grew 29% YoY to | 10932 crore. The company bolstered its offering and continued to fill white spaces through acquisitions (spent more than | 8000+ crore in FY22). RoCE also improved by 130 bps YoY to 11.5% in FY22. Reliance Retail over the last five years has created world class ecosystem (online+offline) with massive scale (revenue and stores) which is well ahead of peers. Over the last five years’ revenue and EBITDA have grown at a robust CAGR of 43% and 59%, respectively (FY17-22). Reliance Retail’s widespread physical store network would further enhance its omni channel capabilities (~17% of revenues) and position it as a frontrunner to garner consistent business growth by capturing a larger pie of the Indian retail sector opportunity. We bake in revenue and EBITDA CAGR of 25% and 40%, respectively in FY22-24E.


Fashion & lifestyle:

  • Registered robust growth YoY (on a favourable base) with footfalls surpassing pre-Covid levels. Average transaction size improved 27% YoY
  • The focus on small towns continued to provide traction as Trends Small Town format continued to scale rapidly. It crossed a milestone of 600 stores with an addition of more than 100 stores during Q4FY22.
  • The company’s brand ‘AJIO’ continued to grow (all-time high revenue) with addition of new brands, catalogue expansion & impactful campaigns. The management indicated that AJIO is increasing awareness of digital fashion in small towns with nearly two-thirds of the orders placed from Tier III & below towns
  • Recovery in the mall stores and sustained growth of digital platforms led the growth in luxury / premium brands business. The luxury premium brands business has strengthened its portfolio through strategic partnerships with leading Indian fashion designers during this period
  • During the quarter it acquired brand ‘Clovia’ (India’s leading bridge-to-premium D2C brand democratizing aspirational innerwear and loungewear) for consideration of | 950 crore. Further it acquired stakes in Indian designer wear brands - AK-OK, Abraham & Thakore, Abu Jani Sandeep Khosla and formed a JV for a new brand with Rahul Mishra


  • The grocery business continued its growth momentum and delivered its best ever quarter driven by strong growth across its store formats, digital and new commerce platforms
  • The business crossed a milestone of 2,000 grocery stores which is the largest network of grocery stores by any retailer in India (added staggering 897 stores in FY22)
  • The management highlighted that the omni-channel value proposition led by JioMart has been well received by customers. Omni channel customers tend to spend 35% higher compared to those customers who shop from only one channel
  • The management indicated that Jio-Mart has strengthened subscription model through the integration of Milk basket with daily orders growing by 100% as compared to last year. Also Jio-Mart Kirana ramped up operations with operationalizing of 21 Smart Hubs and 34 Staples hubs during the quarter to improve reach and service levels. The main focus of the business is to ramp up merchant on-boarding through focused and sustained efforts and by adding region specific assortment

Consumer electronics: 

  • The Consumer Electronics business delivered a strong performance across its stores driven by recovery of mall stores and continued uptick in small towns (double digit growth in store sales YoY)
  • The business witnessed broad based growth across all categories particularly in air conditioners on the back of early onset of summer. Mobiles, laptops and TVs also performed well
  • Registered best ever Republic day sale with 20% YoY growth
  • Reliance Digital stores crossed the benchmark of 500+ in Q4FY22
  • The company’s own and licensed brand portfolio grew 70% over last quarter. The focus of the business has been to continuously increase assortment with introduction of new product lines and assortment upgrades with ambition to garner higher customer wallet share

On the future strategy front, the company is expected to continue with its aggressive store network expansion and strengthen its digital commerce and omni channel capabilities. Also the management indicated that it would continue to on board new merchants and augment its own product design capabilities and grow its own brand portfolio and focus on scale up of new businesses.


Energy segments

O2C profitability below estimates; E&P growth continues

  • O2C revenue was at | 145786 crore, up 44.2% YoY, 10.9% QoQ, against our estimate of | 155311 crore. Revenue growth was mainly attributed to higher realisation following increase in crude oil prices
  • EBITDA grew 24.8% YoY (and 5.3% QoQ) to | 14241 crore, weaker than our estimate of | 22188 crore. On QoQ basis, while higher product cracks led to increase in refining EBITDA, lower petchem margins due to higher feedstock prices limited growth in overall O2C EBITDA as per our understanding
  • Going ahead, we estimate O2C EBITDA at | 78020 crore and | 70547.9 crore in FY23E and FY24E, respectively, as we estimate higher GRMs taking into account current product cracks trend
  • E&P segment revenue growth YoY was driven by increase in realisation as well as output from KG basin. Revenue at | 2008 crore was up 136.8% YoY (and 55.7% QoQ). Domestic production was 40.4 BCFe, up 127% YoY. KG-D6 production during Q4FY22 was ~18 mmscmd
  • KG-D6 realisation increased 69% YoY post revision in gas prices in October that led to EBITDA growth. EBITDA was at | 1556 crore vs. EBITDA of | 480 crore in Q4FY21 and | 2033 crore in Q3FY22 (our estimate: | 1437 crore). On QoQ basis, decline in EBITDA was due to lower production as company divested its stake in US Shale business in Q3FY22
  • We revise estimates taking into account current oil & gas prices trend. Gas ceiling price was revised upwards by ~62% from April 2022 onwards and is expected to remain healthy in FY23E, which augurs well for the segment. Going ahead, we estimate E&P EBITDA at | 11976.9 crore and | 15531.3 crore in FY23E and FY24E, respectively
Variance Analysis

  Q4FY22 Q4FY22E Q4FY21 YoY (%) Q3FY22 QoQ (%)   Comments
Total Revenues 2,11,887.0 2,11,831.6 1,54,896.0 36.8 1,91,271.0 10.8   In line with estimates
Raw materials costs 1,45,009.0 1,36,957.1 1,01,537.0 42.8 1,26,169.0 14.9    
Employees Cost 5,278.0 4,294.1 3,976.0 32.7 4,660.0 13.3    
Other Expenses 30,234.0 31,755.9 26,032.0 16.1 716.0 4,122.6    
Total Expenditure 1,80,521.0 1,73,007.1 1,31,545.0 37.2 1,31,545.0 37.2    
EBITDA 31,366.0 38,824.5 23,351.0 34.3 29,706.0 5.6   Below estimates on account of lower than expected O2C profitability
EBITDA margins (%) 14.8 18.3 15.1 -27 bps 15.5 -73 bps    
Depreciation 8,001.0 7,815.0 6,973.0 14.7 7,683.0 4.1    
EBIT 23,365.0 31,009.5 16,378.0 42.7 22,023.0 6.1    
Interest 3,556.0 3,250.0 4,044.0 -12.1 3,812.0 -6.7    
Other Income 2,602.0 4,250.0 3,251.0 -20.0 4,180.0 -37.8    
Extra Ordinary Item 0.0 0.0 797.0 NA 2,836.0 NA    
PBT 22,411.0 32,009.5 16,382.0 36.8 25,227.0 -11.2    
Total Tax 4,390.0 8,066.4 1,387.0 216.5 4,688.0 -6.4    
PAT 16,203.0 21,773.0 13,227.0 22.5 18,549.0 -12.6   Weaker than expected O2C profitability resulted in lower than anticipated PAT
Key Metrics                
Exchange rate (|/$) 75.2 75.2 72.9 3.2 75.0 0.4    
ARPU (|) 167.6 164.1 138.2 21.3 151.6 10.6    
Subscribers (mn) 410.2 416.4 426.2 -3.8 421.0 -2.6    
Retail revenue (| crore) 58019.0 56127.0 46099.0 25.9 57717.0 0.5   Store addition: 795, footfalls: 104% of pre-Covid levels. Core revenue grew 25% YoY
Retail EBITDA (| crore) 3712.0 3948.0 3623.0 2.5 3835.0 -3.2   EBITDA margins (excluding other income) declined 40 bps YoY to 6.2%. Other income stood at | 121 crore vs. 534 crore in Q4FY21
O2C EBITDA (| crore) 14241.0 22187.8 11407.0 24.8 13530.0 5.3   Lower than expectations
E&P EBITDA (| crore) 1556.0 1436.7 480.0 224.2 2033.0 -23.5    
Gas output (mmscmd) 12.7 13.9 7.6 66.3 13.1 -2.9    


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