Reliance Industries Rating: Buy – Relatively subdued quarter for company

While only 123 stores were added in Q1 (vs 826 in Q4), 700+ stores are ready for launch.

We expected Q1 to be subdued due to the impact of the second wave of the pandemic. Consolidated Ebitda (flat q-o-q) was in-line. Retail was much weaker, with Ebitda (-46% q-o-q) 23% below our estimates). But the impact was offset by better energy business (stand-alone Ebitda +12% q-q, 4% higher vs our estimate), and Jio (Ebitda +4% q-o-q, 2% higher vs our estimate). Driven by 16% q-o-q lower finance cost and 30% higher other income, PBT (+6% q-o-q) was 8% higher than our estimates. Due to q-o-q increased effective tax (20%, vs 9% in Q4), PAT declined 7% q-o-q, but was 14% higher than our estimates.

Energy: O2C was resilient
Oil to chemicals (O2C) segment was relatively resilient and segment Ebitda further increased 6% q-o-q. Apart from higher volumes (throughput +2% q-q), we estimate that refining margins would also be marginally better. After starting in Dec-20, KG-basin production further moved up to average 16.6mmscmd in Q1FY22 (vs 7.1 mmscmd in Q4). Despite ~9% reduction in domestic gas ceiling prices, E&P segment Ebitda was up 66% q-o-q, and Ebit was up 105%. With likely 55-60% increase in gas prices from Oct-21, and further ramp-up in gas production, E&P earnings will likely rise sharply from Q3FY22F.

Jio: marginally ahead on higher net adds /ARPU; FTTH gaining traction
Both standalone revenue and Ebitda were up 4% q-o-q and 2% ahead of our estimates. Overall net adds were healthy at 14.3mn (vs 15.4mn in Q4) and blended ARPU at `138 was flat q-o-q as higher days (91 vs 90 in Q4), FTTH contribution offset free COVID recharges on Jiophone. Ebitda margin at 47.9% (+10bps q-o-q) was in-line. With continued market share gains, FTTH/enterprise ramp-up, strategic tie-ups, in-house 5G capabilities, increased spectrum footprint and digital ecosystem rollout, the outlook remains strong.

Retail: COVID-19 second wave impact higher than our estimates
With average footfalls dropping to 46% of pre-Covid level (vs 88% in Q4), and only 26% stores fully open, retail business was significantly impacted. Though q-o-q revenue decline was only 16%, Ebitda declined sharp 46% q-q. Operating Ebitda margin declined to 3.6% (vs 6.7% in Q4), likely driven by lower contribution from fashion and lifestyle. With restrictions easing, we expect a gradual revival over next few months. While only 123 stores were added in Q1 (vs 826 in Q4), 700+ stores are ready for launch.

After pandemic impact in Q1, we expect most segments to improve
After a relatively subdued Q1, we expect each of the key segments to improve. O2C should benefit from gradually rising refining margins, and domestic demand revival. E&P would get a boost from a likely sharp price increase in H2, and further production ramp-up. We expect Retail to benefit from revival of footfalls, new store openings, and rising share of new commerce. For Jio, subs addition remains robust and should get a boost from Jiophone Next launch, but tariff hike remains a key trigger and now seems pushed out by few months to H2FY22F, in our view.

Valuation methodology: We use a SOTP methodology to value RIL’s different businesses. For its core refining/ petchem businesses, 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 FY22F-23F EV/Ebitda. We value Reliance Retail at 27x average FY22F-23F blended EV/Ebitda. Our TP is Rs 2,400.

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