Reliance Industries Rating ‘buy’; second quarter results were a mixed bag

After a weak Q1, we expected a recovery in petchem and retail, while refining was expected to be weak. Reported Q2 refining earnings were much weaker than our estimate. However, petchem, Jio and retail earnings were better than our expectations. Standalone Ebitda (+8% q-o-q, -44% y-o-y) and consolidated Ebitda (+12% q-o-q, but -16% y-o-y) were ~3% ahead of our estimates.

Consolidated adjusted PBT (+28% q-o-q, -30% y-o-y) was 10% below our estimate, as the decline/increase in interest cost/other income after the recent stake sale were lower than our estimates. However, consolidated adjusted PAT of Rs 95.6 bn (+16% q-o-q, -15% y-o-y) was 10% ahead of our estimate due to a very low effective tax rate.

Refining very weak with 10-year low GRM; petchem recovery much better: Reported GRM of $5.7/bbl (vs $6.3 in Q1) was the lowest in over a decade. Also, throughput at 15.3mmt (-8% q-o-q) was lower due to shut-down. Refining Ebit of Rs 17.5 bn (-36% q-o-q,-66% y-o-y) was lowest in nearly eight years. Compared with the two-decade low of -0.9/bbl in Q1, SG complex margins at $0.05/bbl recovered marginally, but were still very low. Margins are weak in Q3 so far and near term outlook is weak.

Petchem saw much stronger recovery, with Ebit of Rs 48.4 bn up 45% q-o-q. Reliance benefited from a strong revival in domestic demand, leading to a much higher placement of products in the domestic market. Also, margins were stronger for PVC, PE and ethane cracking.

Jio did marginally better than our expectation: Standalone revenue at Rs 175 bn (+6% q-o-q, +33% y-o-y) was 2% ahead of our estimate, driven by a 3% q-o-q improvement in ARPU to Rs 145 and 2% q-o-q growth in the wireless subscriber base to 404 mn. Ebitda at Rs 75 bn (+7% q-o-q, +46% y-o-y) was 2% ahead of our estimate.

With continued market share gains, ramp-up of FTTH/enterprise services, tie-ups with strategic investors, in-house 5G capabilities and roll-out of digital ecosystem, we believe the outlook remains strong.

Retail saw better than expected recovery: Compared with just 50% stores in Q1, nearly 85% stores were operational in Q2. Footfalls are steadily recovering (reached 85% of pre-COVID-19 levels in September), but levels remain low for fashion and lifestyle. Revenue at Rs 392 bn (+24% q-o-q) was down just 5% y-o-y, and should reach pre-COVID-19 levels soon. Ebitda at Rs 19.9 bn (+83% q-o-q, -15% y-o-y) was 18% above our estimate.

However, consolidated adjusted PAT of Rs 95.6 bn (+16% q-o-q, -15% y-o-y) was 10% ahead of our estimate due to a very low effective tax rate.

Net debt reduces sharply: With funds inflow of Rs 1,467 bn ($20 bn) from transactions in H1, RIL’s net debt fell to Rs 935 bn as at end-Sep, and also other financial liabilities like capex creditors have declined sharply. With further inflow of `302 bn for Retail transactions in Q3, and balance commitments of Rs 736 bn (for Jio and Rights issue), RIL is effectively debt free.

Valuation: We use an SOTP methodology to value RIL’s different businesses. For refining/ petchem, we use 7x/8x average of FY22-23F EV/Ebitda. We use DCF to value the E&P business. We value R-Jio at 11x average FY22-23F EV/Ebitda and Reliance Retail at 27x average FY22-23F blended EV/Ebitda. Our TP is Rs 2,450. The benchmark index for this stock is Nifty 50.