Reliance Industries Rating: buy: Quarter saw a rebound across segments

The Reliance Industries Ltd. oil refinery in Jamnagar, Gujarat, India, on Saturday, July 31, 2021. The Indian city of Jamnagar is a money-making machine for Asia's richest man, Mukesh Ambani, processing crude oil into fuel, plastics and chemicals at the world's biggest oil refining complex that can produce 1.4 million barrels of petroleum a day. Photographer: Dhiraj Singh/Bloomberg

Reliance Industries’ (RIL’s) Q2FY22 EPS was up 43% y-o-y driven by rise in Ebitda across segments and fall in interest cost. Oct’21-TD Singapore GRM is at 25-month high on Chinese refinery utilisation fall, demand rise on switch from gas to liquid fuels, and fall in US and Asian auto fuel inventories. RIL’s GRM lags Singapore GRM, but is at 21-month high. GRM strength is likely to sustain until Mar’22 or even extend to FY23e especially if winter is severe, but there are headwinds, too.

Strong vaccination campaign that means no or muted third Covid wave may see retail Ebitda at a new high in Q4FY22e. Valuing retail and O2C on FY24e Ebitda leads to upgrade in TP by 24% to Rs 2,510. Retain Hold.
Q2 up on rebound across segments on low base: Q2FY22 consolidated EPS was up 43% y-o-y vs PBT jump of 83% y-o-y on Rs 38-bn y-o-y surge in tax. Q2 rise was driven by (i) 15-21% y-o-y rise in digital services and retail Ebitda; (ii) 44% y-o-y rise in O2C Ebitda; (iii) oil & gas Ebitda of Rs 11 bn vs Rs 1.9 bn loss in Q2FY21; and (iv) 37% y-o-y fall in interest cost. H1 EPS is up 46% y-o-y.

GRM at $7.3/bbl; no third wave key to retail outlook: Reuters’ Singapore GRM is up from $3.2/bbl in Aug’21 to $7.3/bbl in Oct’21-TD driven by rise in transportation fuel cracks to 22-69 month highs. Oil demand rise by 0.75m b/d on switch from gas to liquid fuels as gas prices surged to levels higher than liquid fuels, demand recovery on fall in Covid cases in Asia-Pacific, fall in Chinese refinery utilisation to lows since May’20 and US and Asian auto fuel inventory fall have boosted GRM. Total and core retail EBITDA rebounded sharply in Q2FY22 but is still 21-25% below Q4FY21 peak.

Raise FY22-FY23e EPS by 0.3-4% & target price by 24%: We have raised FY22-23e EPS by 0.3-4%; it is net impact of 10-9% upgrade in RJio’s profit, 45% upgrade in FY23e oil & gas Ebitda on 40% upgrade in KG D6 gas price, and 10% cut in FY23e retail Ebitda. We have raised our TP by 24% to `2,510 on valuing O2C and retail at 7-30x FY24e Ebitda (up 5-35% y-o-y) vs FY23e Ebitda earlier; FY24e GRM is estimated at $10/bbl vs $8.5/bbl in FY23e.

Areas of concern: To deleverage, RIL sold stakes in RJio and retail vs in O2C as initially planned. While 20% stake sale in O2C to Aramco is yet to be done, RIL is set to invest $10 bn in renewables to achieve net zero carbon. RoCE and RoE were low at 6-13% and dividend payout at just 10-14% in FY12-FY21. The weak third telecom player matching cashback on recharge by competition suggests yet another delay in tariff hike.