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Reliance Industries | BUY 23 January 2021 India | Oil and Gas | Company Update Reliance Industries | BUY Operationally in-line results; focus on improvement in Jio’s subscriber addition RIL’s consolidated EBITDA for 3QFY21 was largely in-line at INR 216bn; however, PAT (before Dayanand Mittal minority) was higher at INR 149bn (vs. JMFe of INR 126bn) due to sharp decline in interest [email protected] | Tel: (+91 96) 1938 8870 cost (to INR 43bn vs. JMFe of INR 52bn) and continued lower taxes. Jio EBITDA was up 6% Vishnu K G QoQ led by 4% QoQ growth in ARPU; however, net additions continued to be subdued due [email protected] | Tel: (+91 94) 4689 6452 to market share losses in incremental MBB subscribers. Further, Retail business is gradually Krishan Parwani recovering post lockdown while margin was healthy at ~7% due to rebound in high margin [email protected] | Tel: (+91 96) 6209 5500 Fashion & Lifestyle segment to pre-Covid levels. O2C business EBITDA was in-line; but lack of details make it difficult to comment on Refining & Petchem margins. Reported net debt declined to INR 369bn at end 3QFY21 (vs. INR 935bn at end 2QFY21 and INR 1,610bn at end FY20) due to the funds received from asset monetisation – Exhibit 3. We reiterate BUY with an unchanged TP of INR 2,500/share as we expect a strong FCF generation phase with major capex completed and strong 17-18% EPS CAGR likely over the next 3-5 years. Recommendation and Price Target Another quarter of subdued subscriber addition for Jio, ARPU surprises positively: Jio reported Current Reco. BUY EBITDA of INR 81.6bn in 3QFY21, a growth of 6% QoQ and was marginally higher vs. JMFe, driven Previous Reco. BUY by robust ARPUs despite muted net subscriber addition (at 5.2mn as expected). In our view, this Current Price Target (12M) 2,500 Upside/(Downside) 21.7% could be mainly due to market share losses in incremental MBB subscribers. However, management Previous Price Target 2,500 expects continued improvement in subscriber additions as more areas of economy open up. ARPU Change NA surprised positively at INR 151 (vs. JMFe of INR 147), driven by the residual impact of Dec’19 tariff hikes and strong usage metrics – data usage per subscriber jumped to 12.9GB/month (vs. Key Data – RIL IN Current Market Price INR2,054 12.1GB/month in 1QFY21 during the peak of the pandemic). Traction was also seen in other digital Market cap (bn) INR13,524.3/US$182.5 investments, with consolidated EBITDA of Jio Platforms Ltd (JPL) growing 6.4% QoQ to INR 84.8bn – Free Float 40% Exhibit 2. We expect Jio to reach ~45% revenue market share (RMS) by FY25E, on the back of Shares in issue (mn) 6,761.6 continued subscriber additions and ARPU increase (A tale of supremacy, defence & survival). Diluted share (mn) 6,444.7 3-mon avg daily val (mn) INR37,938.3/US$511.9 Retail business gradually recovering post lockdown: Retail adjusted EBITDA was 10% below JMFe at 52-week range 2,371/867 INR 23.2bn (up 15% QoQ but still down 15% YoY); however, EBITDA margin was healthy at ~7% Sensex/Nifty 39,614/11,642 due to rebound in high margin Fashion & Lifestyle segment to pre-Covid levels. In 3QFY21, 96% of INR/US$ 74.1 stores were operational (vs. 85%/50% in 2QFY21/ and 50% in 1QFY21) but only half were fully Price Performance operational; footfalls were still below pre-Covid levels and footfall in malls is still at 50%. % 1M 6M 12M O2C EBITDA in-line; lack of details make it difficult to comment on Refining & Petchem margins: Absolute -8.0 41.5 40.2 O2C business (i.e. refining and petchem segment) EBITDA at INR 98bn (up 10% QoQ) was largely in- Relative* -11.6 20.4 41.8 * To the BSE Sensex line; but it’s difficult to comment on refining and petchem margins separately as company has started disclosing earnings and operational performance for combined O2C business. Management expects petchem margins recovery to continue on rebound in domestic demand while refining margin outlook continues to be subdued and contingent on the recovery in global oil demand. Entering a strong FCF generation phase – reiterate BUY: We cut our FY22-23 EBITDA estimates by 1- 2% factoring weak GRM; however, our TP is unchanged at INR 2,500 as we roll forward our valuations. RIL is entering a strong FCF generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years. Hence, we re-iterate BUY (A Giant Digital Leap). At CMP, stock is trading at FY23E P/E of 17.0x (3 yr avg: 20.2x) and FY23E EV/EBITDA of 8.2x (3 yr avg: 11.7x). Key risks: a) weak subscriber addition and limited ARPU hike; b) challenges in monetisation of digital opportunities/new commerce; and c) weak downstream margins. Financial Summary (INR mn) Y/E March FY19A FY20A FY21E FY22E FY23E Net Sales 5,692,090 5,967,430 4,922,651 6,428,703 7,233,779 Sales Growth (%) 45.3 4.8 -17.5 30.6 12.5 JM Financial Research is also available on: EBITDA 841,670 882,170 810,522 1,177,307 1,443,660 Bloomberg - JMFR <GO>, EBITDA Margin (%) 14.8 14.8 16.5 18.3 20.0 Thomson Publisher & Reuters, Adjusted Net Profit 398,370 443,240 440,863 591,307 760,268 Diluted EPS (INR) 67.2 69.9 68.4 87.5 112.4 S&P Capital IQ, FactSet and Visible Alpha Diluted EPS Growth (%) 10.4 4.0 -2.2 27.8 28.6 ROIC (%) 11.2 11.3 11.2 12.8 15.1 Please see Appendix I at the end of this ROE (%) 11.7 10.5 8.5 9.3 10.6 report for Important Disclosures and P/E (x) 28.5 27.4 28.0 21.9 17.0 P/B (x) 2.9 2.7 2.1 1.9 1.7 Disclaimers and Research Analyst EV/EBITDA (x) 17.7 16.9 15.7 10.4 8.2 Certification. Dividend Yield (%) 0.3 0.3 0.4 0.4 0.6 JM Financial Institutional Securities Limited Reliance Industries 23 January 2021 3QFY21 Result Review Key takeaways from post-earnings webinar: Digital business: Gross additions were subdued at 25.1mn in 3QFY21 (vs. 27.2mn seen in 2QFY21) and lower than the pre-Covid run rate of ~30-35mn. Management indicated an improving outlook for gross additions as normalcy returns to more parts of the country Management reiterated the readiness of their 4G network to be upgraded to 5G, and highlighted that Jio is now at the cusp of launching 5G using solutions which have been developed internally through JPL. Jio highlighted that many of their 5G technologies have already undergone field trials. While management did not separately give Jio Fiber subscriber numbers, Jio has indicated significant traction in the FTTH business, and highlighted that they are now the largest private sector player in FTTH. As per management, there are more than 200 third party applications available on Jio Fibre and Jio would introduce offerings like smart IoT and gaming solutions on top of the existing offerings. Jio further has plans to increase monetisation of Jio Fiber through advertisements etc. RIL highlighted that they are working with partners, to provide a comprehensive solutions for SMBs (Small and Medium Businesses), to meet their enterprise needs. Jio also plans to work with sister companies like Reliance Digital to create unique offerings for SMBs. Jio’s Enterprise grade video conferencing solution, Jio Meet crossed 15mn subscribers in 3QFY21. Exhibit 1.Jio standalone quarterly snapshot Consolidated, INR mn 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 QoQ (%) YoY (%) Revenue 123,990 131,570 139,860 148,610 168,330 176,780 185,440 4.9% 32.6% Operating costs 77,130 79,910 83,850 86,600 95,520 99,770 103,780 4.0% 23.8% -Network costs 38,240 41,230 44,230 45,600 52,250 54,260 56,530 4.2% 27.8% -License fees, SUC and other revenue share 12,870 13,740 14,830 15,760 18,180 19,460 20,390 4.8% 37.5% -Other costs 26,020 24,940 24,790 25,240 25,090 26,050 26,860 3.1% 8.3% EBITDA 46,860 51,660 56,010 62,010 72,810 77,010 81,660 6.0% 45.8% Depreciation & Amortization 16,570 17,750 17,960 21,680 27,380 28,710 29,100 1.4% 62.0% EBIT 30,290 33,910 38,050 40,330 45,430 48,300 52,560 8.8% 38.1% Interest cost 16,600 18,710 19,530 11,330 11,680 10,220 8,500 -16.8% -56.5% Reported PBT 13,690 15,200 18,520 29,000 33,750 38,080 44,060 15.7% 137.9% Tax 4,780 5,300 3,250 6,000 8,550 9,640 11,150 15.7% 243.1% Reported PAT 8,910 9,900 13,500 23,310 25,200 28,440 32,910 15.7% 143.8% Reported EPS 1.50 1.67 2.58 3.63 3.91 4.41 5.11 15.7% 98.2% Tax/PBT (%) 34.9% 34.9% 17.5% 20.7% 25.3% 25.3% 25.3% Source: Company, JM Financial. Total Digital EBITDA was up ~7% QoQ to INR 89.4bn, of which JPL’s EBITDA was INR 84.8bn (including Jio business EBITDA of INR 81.6bn).
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