Reliance Industries HOLD

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July 25, 2021 BSE Sensex: 52976 Reliance Industries HOLD ICICI Securities Limited Maintain is the author and distributor of this report Rebound from lows, but headwinds continue Rs2,105 Reliance Industries’ (RIL) Q1FY22 recurring EPS was up 48% YoY (PBT up 111%, Q1FY22 results review but tax up 13.3x on normalisation) driven by rise in EBITDA across segments and and earnings revision halving of interest cost. Petrochemicals’ EBITDA was at an all-time high, but GRMs remain weak. Retail EBITDA fell QoQ due to covid second wave. Net impact Oil & Gas and of cut in O2C and retail EBITDA by 6-25%, raising oil & gas and digital EBITDA by Petrochemicals 120-1% and cut in DD&A by 5% is cut in FY22E EPS by 1% and target price by 1% to Rs2,017. GRM weakness, petrochemical margin fall from peak and a third covid Target price Rs2,017 wave delaying retail recovery may mean more downside to FY22E EPS. Stock underperformance continues and will continue unless there is a tariff hike, retail Earnings revision growth is back to pre-covid levels, or GRM recovers. Retain HOLD. (%) FY22E FY23E Sales ↓ 0.2 ↑ 0.4  Q1 up YoY on low base: Q1FY22 consolidated recurring EPS was up 48% YoY vs EBITDA ↓ 2.8 ↑ 4.2 PBT jump of 111% YoY on 13.3x YoY surge in tax. Q1 was driven by: 1) 19-29%

EPS ↓ 1.3 ↑ 10.2 YoY rise in digital services and retail EBITDA (down 55% QoQ hit by covid); 2) 50%

YoY rise in O2C EBITDA due to strength in petrochemicals; 3) oil & gas EBITDA of Target price revision Rs8bn vs Rs320m loss in Q1FY21; and 4) 50% YoY fall in interest cost. Rs2,017 from Rs2,033  Cut FY22E EPS by 1%; more downside possible: We have cut FY22E: 1) retail Shareholding pattern EBITDA by 25% to Rs102bn (up 20% YoY), and 2) O2C EBITDA by 6% to Rs497bn Dec Mar Jun (up 30% YoY). However, we have: 1) raised oil & gas EBITDA by 120% to Rs55bn ’20 ’21 ’21 Promoters 50.5 50.6 50.6 on 53% cut in KG D6 opex (based on Q1), 15% upgrade in KG D6 volume, 7% Institutional higher KG D6 gas price, and 9-28% higher oil & gas price for US shale operations; 2) investors 38.1 38.3 38.2 vs MFs & other 4.9 4.4 4.7 raised digital EBITDA by 1% (30mn net subs rise 20mn); and 3) cut DD&A by 5% FIs/ Banks 0.0 0.0 0.0 to factor-in the Q1 trend. The net impact is cut in FY22E EPS by 1% and target price Insurance 5.8 5.9 6.1 by 1% to Rs2,017 (4% downside). Further downside to our FY22E EPS is possible if: FIIs 27.4 28.0 27.4

Others 11.4 11.1 11.2 1) GRM is lower than our revised estimate of US$6/bbl; 2) petrochemical margins fall Source: www.nseindia.com further from peak; and 3) third wave of covid hits retail EBITDA. Raising KG D6 gas price by 28% to US$8/mmbtu in line with oil and spot LNG futures and lower opex Price chart meant upgrade in FY23E oil & gas EBITDA by 105% and EPS by 10%. 2500  Tariff hike & retail growth back to pre-covid level likely triggers: RIL continues 2000 underperforming (since mid-Sep’20) the market and peers across businesses.

1500 Petrochemical margins are already down from peak and large capacity additions in

(Rs) products that account for 70% of RIL’s volumes may mean further correction. Diesel 1000 cracks’ rise to pre-covid levels is key to GRM recovery but, with only 3.6m b/d 500 refinery closures announced vs 6m b/d needed, recovery is likely to be slow. Q1 0 retail EBITDA was down 55% QoQ and a possible third wave may mean retail growth would be back to pre-covid levels only in FY23E. A tariff hike and return of Jul-18 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21

retail growth to pre-covid levels in FY23E may see the stock performance improving.

Market Cap Rs13794bn/US$185.3bn Year to Mar 2020 2021 2022E 2023E Research Analysts: Reuters/Bloomberg RELI.BO/RIL IN Revenue (Rs bn) 6,124 4,863 7,730 8,752 Shares Outstanding (mn) 6,339.4 Net Income (Rs bn) 438 435 536 754 Vidyadhar Ginde 52-week Range (Rs) 2325/1842 EPS (Rs) 74 67 83 117 [email protected] +91 22 6637 7274 Free Float (%) 49.4 % Chg YoY 12% -9% 23% 41% Sanjesh Jain FII (%) 23.0 P/E (x) 28 31 25 18 [email protected] Daily Volume (US$/'000) 2,76,884 CEPS (Rs) 102 109 134 174 +91 22 6637 7153 Aksh Vashishth Absolute Return 3m (%) 10.9 EV/E (x) 18.2 20.1 14.0 10.9 [email protected] Absolute Return 12m (%) 2.7 Dividend Yield (%) 0.3% 0.3% 0.4% 0.4% +91 22 6637 7386 Sensex Return 3m (%) 11.3 RoCE (%) 6.9% 6.3% 5.7% 7.1% Sensex Return 12m (%) 40.4 RoE (%) 10.3% 7.5% 7.2% 9.2%

Please refer to important disclosures at the end of this report

Reliance Industries, July 25, 2021 ICICI Securities

TABLE OF CONTENTS

Rebound from lows, but headwinds continue ...... 3 Cut FY22E EPS by 1%; more downside possible ...... 3 Raise FY23E EPS by 10%; downside not ruled out ...... 6 RIL continues to underperform ...... 9 Takeaways from Q1 investor meet and presentation ...... 11 Q1FY22 PBT up 111% YoY but EPS up 48% YoY ...... 17 Q1 recurring EPS up 48% YoY, but down 1% QoQ ...... 17 Risks ...... 20 Financial summary ...... 22

Reliance Industries, July 25, 2021 ICICI Securities

Rebound from lows, but headwinds continue

Cut FY22E EPS by 1%; more downside possible

Cut FY22-FY23E retail EBITDA by 25-2%; more downside possible We have cut RIL’s retail EBITDA:

 For FY22E by 25% to Rs102bn (up 20% YoY) mainly due to disappointment in Q1 when EBITDA at Rs14bn was 36% lower than our estimate of Rs22bn and commentary, which suggested Q2FY22E retail operations and EBITDA would be well below pre-covid levels.

 For FY23E by 2% to Rs188bn (up 84% YoY).

If there is a third wave of covid, it is likely to mean further downside to our FY22E as well as FY23E retail EBITDA estimate.

Reduce O2C EBITDA by 6% to Rs497bn on cut in GRM by US$1/bbl We have reduced RIL’s FY22E O2C EBITDA by 6% mainly due to cut in GRM estimate to US$6/bbl from US$7/bbl earlier. We estimate Q1 GRM including inventory gains at ~US$4.5/bbl.

Raise FY22-FY23E oil & gas EBITDA by 120-105% We have raised RIL’s FY22-FY23E oil & gas EBITDA by 120-105% to Rs55bn-98bn due to estimating:  KG-D6 opex based on Q1 results at US$1.4/mmbtu vs US$3/mmbtu earlier. Q1 standalone oil & gas EBITDA was US$2.6/mmbtu when gas price was US$4/mmbtu implying opex of US$1.4/mmbtu.  RIL’s 66.67% share of KG-D6 gas volumes to be 15% higher than earlier at 12.4mmscmd (10.8mmscmd earlier) in FY22E due to earlier than expected start of production from satellite fields and faster than expected ramp-up of production both from ‘R’ cluster and satellite fields.  KG-D6 gas price being 7-28% higher than earlier estimated at US$5.5-8.0/mmbtu in FY22-FY23E. 5mmscmd of KG-D6 gas was tied up at Brent linked prices (8.5- 8.6%) in Nov’19 and another 13mmscmd at JKM spot LNG prices in Feb’21 (US$0.18/mmbtu discount to JKM spot LNG) and May’21 (US$0.06/mmbtu discount to JKM spot LNG). Revised prices are based on to-date oil and spot LNG prices and futures as of 23-Jul’21. Both oil and spot LNG prices and futures are higher than they were when we last estimated KG-D6 gas price in FY22E-FY23E.  9-28% higher US oil (WTI) & gas (Henry Hub) prices than earlier estimated for shale operations based on futures.

Reliance Industries, July 25, 2021 ICICI Securities

Raise RIL’s FY22-FY23E digital services EBITDA by 1-2% We have raised RIL’s FY22-FY23E digital services EBITDA by 1-2% to Rs453bn- 525bn (up 33-16% YoY) due to now estimating net subscribers’ addition at 30mn in FY22E vs 20mn earlier. We are now estimating net subscribers at:

 456mn vs 446mn earlier and net subscribers’ addition at 30mn vs 20mn in FY22E

 471mn vs 461mn earlier in FY23E. Net subscribers’ addition estimate remains unchanged at 15mn.

Cut FY22E EPS by 1% as retail & O2C cut; oil & gas & digital raised We have cut RIL’s FY22E EPS by 1%, which is the net impact of:

 Cut in retail EBITDA by 25%.

 Cut in O2C EBITDA by 6%.

 Cut in DD&A by 5% to factor-in the Q1 trend. Q1 standalone DD&A was 5% and consolidated DD&A 8% lower than our estimate. RIL has over the years moved to written down value (WDV) from straight line method (SLM) of depreciation on large part of its O2C assets, which has meant YoY decline in O2C DD&A. RIL’s O2C DD&A at Rs80bn in FY21 was down 4% YoY despite petcoke gasifier (Rs560bn) being capitalised. Petrochemical depreciation was down 17% YoY in H1FY21 at Rs20bn while refining was up 42% YoY at Rs18bn due to petcoke gasifier.

 Upgrade in oil & gas EBITDA by 120%

 Upgrade in digital services EBITDA by 1%

Estimate FY22 PBT to be up 43% YoY and EPS up 23% YoY We now estimate RIL’s FY22E pre-tax profit to be up 43% YoY and EPS to expand 23% YoY driven by rise in:

 Digital services’ EBITDA by 33% YoY.

 Retail EBITDA by 20% YoY. Our FY22E retail EBITDA estimate is 6% higher than in FY20.

 O2C EBITDA by 30% YoY. We are assuming petrochemical EBITDA to be up 30% YoY and refining to be up 31% YoY.

Further downside to FY22E EPS not ruled out Further downside to our FY22E EPS is possible if:

 GRM is lower than our revised estimate of US$6/bbl. We estimate RIL’s Q1 GRM at just US$4.5/bbl with core GRM being just US$2.32/bbl. GRM has corrected further in Q2FY22-TD as rise in fuel and losses and fall in LPG, petcoke and propylene cracks have more than neutralised gains from rise in petrol and naphtha

Reliance Industries, July 25, 2021 ICICI Securities

cracks. Diesel cracks remain weak at US$5.2/bbl and well below pre-covid level of US$11-15.3/bbl in Q1-Q4FY20.

 Petrochemical margins decline further from peak as capacities are added globally. We estimate RIL’s petrochemical margin in Q2FY22-TD to be 4-8% lower than Q4FY21-Q1FY22 levels. Large capacity additions in products that account for 70% of RIL’s volumes may mean further correction.

 There is a third wave of covid, which hits retail EBITDA and delays its recovery to pre-covid levels.

Q1FY22 retail EBITDA down 55% QoQ, but up 29% YoY In Q4FY21, retail EBITDA was up YoY for the first time since the pandemic hit. However, the restrictions imposed due to second wave of covid hurt retail, though performance in Q1FY22 was better than in Q1FY21 as follows:

 Revenue was down 18% QoQ but up 22% YoY; core revenue was down 31% QoQ but up 66% YoY.

 EBITDA was down 55% QoQ but up 29% YoY; core EBITDA was down 62% QoQ but up 43% YoY.

 Footfalls at 46% of pre-covid levels in Q1FY22 were lower than 88% in Q4FY21, 75% in Q2-Q3FY21 but higher than 43% in Q1FY21.

 Stores operational at 61% (26% fully open and 35% partially open) in Q1FY22 were lower than 94% in Q4FY21, 96% in Q3FY21, 85% in Q2FY21 but higher than 50% in Q1FY21.

Chart 1: Footfalls & operational stores at 46-61% of Chart 2: Retail EBITDA in Q1FY22 lowest since pre-covid levels in Q1FY22 lowest since Q1FY21 Q1FY21; thus, second-lowest during pandemic

Retail EBITDA 35.0 30.9 30.0

25.0 23.1 20.1 20.0 bn) - 14.0

(Rs 15.0 10.9 10.0

5.0

0.0 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

Source: Company data, I-Sec research Source: Company data, I-Sec research

Reliance Industries, July 25, 2021 ICICI Securities

Further downside to retail EBITDA if there is a third wave Operating store hours declined from 70% in Apr’21 to 25% in May’21, but rebounded to 38% in Jun’21. In the investor meet, RIL indicated that operating store hours are up further in Jul-TD but are still below Apr’21 levels. Thus, Q2FY22E retail operations and EBITDA are likely to be up QoQ but still below pre-covid levels. We are assuming retail EBITDA at Rs23bn in Q2, Rs30bn in Q3 and Rs35bn in Q4FY22E implying Q3 almost back to Q4FY21 peak and Q4FY22E at a new high. Some downside to these estimates cannot be ruled out but downside would be imminent if there is a third wave.

Table 1: RIL’s FY22E EPS cut by 1%, but FY23E EPS raised by 10% FY22E FY23E New Old New Old Change Change estimate estimate estimate estimate EPS 83.1 84.2 -1% 117.1 106.2 10% O2C EBITDA (Rs-bn) 497 531 -6% 557 557 0% Oil & gas EBITDA (Rs-bn) 55 25 120% 98 48 105% Digital services EBITDA (Rs-bn) 453 447 1% 525 517 2% Retail EBITDA (Rs-bn) 102 137 -25% 188 192 -2% Source: I-Sec research

Raise FY23E EPS by 10%; downside not ruled out

Raise FY23E EPS by 10% as oil & gas and telecom EBITDA raised We have raised RIL’s FY23E EPS by 10%, which is net impact of:

 Upgrade in oil & gas EBITDA by 105%.

 Upgrade in digital services EBITDA by 2%.

 Cut in DD&A by 8%.

 Cut in retail EBITDA by 2%.

Chart 3: Diesel cracks at US$5.0/bbl in Jul’21-TD vs Chart 4: IEA estimates global diesel demand to go pre-covid level of US$10.3-16.2/bbl above pre-covid levels in CY22 Diesel YoY change % Diesel cracks 30.0 29.5 10% 29.3 29.4 11.8 29.1 28.8 28.9 12.0 10.310.8 29.0 5% 8.5 9.0 28.0 28.5 6.6 5.8 5.8 0% 6.0 5.2 4.8 5.25.0 27.0 (%) 4.2 4.7 4.3 b/d) (m 3.7 4.1 27.0

(US$/bbl) 3.1 2.5 3.0 1.8 -5% 26.0 0.0 25.0 -10% Jul-20 Apr-20 Oct-20 Apr-21 Jan-20 Jun-20 Jan-21 Jun-21 Feb-20 Mar-20 Feb-21 Mar-21 Nov-20 Dec-20 Aug-20 Sep-20 May-20 May-21 CY19 CY20 Jul'21-TD CY21E CY22E CY23E CY24E CY25E CY26E

Source: Reuters, I-Sec research Source: IEA, I-Sec research

Reliance Industries, July 25, 2021 ICICI Securities

GRM lower than US$8.5/bbl not ruled out; diesel cracks recovery key We estimate RIL’s core GRM at US$8.5/bbl in FY23E vs US$4.5/bbl in Q1FY22 and US$6/bbl in FY22E. Recovery in diesel cracks, which are at US$5.2/bbl in FY22-TD and well below pre-covid level of US$11.0-14.3/bbl in Q4-Q3FY20, is crucial to RIL’s FY22E GRM being in line with our estimate. Recovery in global diesel demand and refinery closures are likely to drive recovery in diesel cracks. IEA estimates global diesel demand to be at pre-covid level in CY22E. However, global refinery closures announced at 3.6m b/d are well below the 6m b/d required as per IEA for global refinery utilisation to rise to above 80%. We estimate global refinery utilisation at 77.8- 79.2% in CY21E-CY22E. Thus, downside to our FY23E GRM estimate is not ruled out.

Downside to FY23E petrochemical EBITDA not ruled out RIL’s petrochemical margin in Q2FY22-TD is down 8% QoQ and latest weekly margin for the week ended 23-Jul’21 is down 7% from Q1FY22 margin and 4% below Q4FY21 margin. Large capacity additions in five petrochemical products that account for over 70% of RIL’s volumes are as follows:  As per ICIS, 28.4mmtpa of polyethylene (PE) capacity would be added in CY20E- CY25E, which would imply that global PE utilisation would reach CY19 level only in CY28E putting pressure on PE margins.  ~15mmtpa of PP capacity addition is estimated in CY20-CY21E vs best case global demand rise of just 5.6mmtpa leading to fall in global PP utilisation to 82% in CY21E.  Large capacity additions are a headwind to PX, PTA and MEG margins, too.

Large global capacity additions and China’s falling imports are likely to see further fall in RIL’s petrochemical margins and EBITDA. Our FY23E petrochemical EBITDA of Rs314bn, which is down 11% YoY, implies RIL’s petrochemical margin fall of just 6% from Q2FY22-TD levels and 13% down from peak in Q1FY22. RIL’s petrochemical EBITDA being lower than our FY23E estimate cannot be ruled out.

Table 2: RIL’s Q2FY22-TD petrochemical margin down 8% QoQ No. of quarters No. of quarters Q1FY22 margin Q2FY22-TD margin QoQ change in WE 23 Jul'21 high – Q1FY22 high – Q2FY22-TD (US$/t) (US$/t) Q2FY22-TD margin (US$/t) margin margin At least 10-quarter Ethane 1,339 1,241 NA -7% 1,231 high ROGC 1,022 738 8-quarter high NA -28% 734 At least 10-quarter Naphtha 1,122 881 NA -21% 919 high Blended At least 10-quarter 1,160 953 NA -18% 957 PE high At least 10-quarter At least 11-quarter PP 622 654 5% 650 high high At least 10-quarter PVC 1,269 1,196 NA -6% 1,196 high POY 789 702 NA NA -11% 705 PSF 626 541 NA NA -14% 544 PET 674 638 NA NA -5% 657 PX 249 248 5-quarter high NA -1% 251 PTA 336 333 NA NA -1% 330 MEG 400 312 NA NA -22% 347 Total 649 601 -8% 604

Source: Bloomberg, I-Sec research

Reliance Industries, July 25, 2021 ICICI Securities

China petrochemical imports to decline as it adds capacity China’s petrochemicals imports are expected to decline as it adds capacity. In CY20, China accounted for:  43% of global net PP imports  90% of global net PX imports  87% of global net imports of MEG

ICIS expects China’s PP imports to fall by 53% YoY, PX imports by 57% YoY and MEG imports by 50% in CY21E.

Downside to FY23E retail EBITDA likely if third wave in FY22 We are estimating strong recovery in retail EBITDA to Rs30bn-35bn in Q3-Q4FY22E assuming no third wave. If there is a third wave, downside is imminent not just to FY22E retail EBITDA but also to FY23E retail EBITDA, which is up 84% YoY

Cut target price by 1% to Rs2,017; implies 4% downside Our target price of Rs2,017/share implies 4% downside. It is a ‘sum of the parts’ (SoTP) valuation, which values RIL’s:  O2C business at Rs3,902bn (US$53bn), or Rs605/share, based on 7x FY23E O2C EBITDA. Table 3: RIL's ‘sum of the parts’ (SoTP) valuation works out to Rs2,017 Valuation Business Valuation measure used US$ bn Rs bn Rs/share Break-up Rs/share Petrochemicals 7x FY23E EV/EBITDA 30 2,197 341 16% Refining 7x FY23E EV/EBITDA 23 1,704 264 13% Oil & gas DCF 4 304 47 2% Media Market value 0.2 17 3 0% Retail 30x FY23E EV/EBITDA 66 4,805 745 35% Digital services DCF 63 4,594 713 34% 187 13,621 2,113 100% Less: net debt 8 618 96 Sum of parts valuation 178 13,003 2,017 Source: I-Sec research

 85.1% stake in organised retail business (RRVL) at Rs4,805bn (US$66bn), or Rs745/share based on 30x FY23E retail EBITDA.  67.1% stake in digital services business (Jio Platforms) at Rs4,098bn (US$56bn), or Rs636/share based on DCF-based EV of Reliance Jio Infocomm Ltd (RJio) and valuing Jio Platforms (excluding RJio) at Rs496bn (US$6.8bn) based on 15x FY23E EBITDA.  Oil & gas business, including gas reserves in India and US shale assets at Rs304bn (US$4bn), or Rs47/share on DCF basis.  Media business at market value of its investment in the media at Rs17bn, or Rs3/share.  Net debt of Rs618bn in Mar’22.

Reliance Industries, July 25, 2021 ICICI Securities

Net debt plus suppliers’ credit/spectrum liability at Rs618bn in FY22E RIL’s net debt excluding suppliers’ credit and deferred spectrum liability was down to Rs228bn in Jun’21 from Rs376bn in Mar’21. However, accounting for Rs565bn of deferred liability on spectrum bought in Mar’21 and suppliers’ credit estimated at Rs120bn, net debt was at Rs913bn in Jun’21. Our net debt/cash estimates for FY22E-FY23 are as follows:  Net debt including suppliers’ credit and deferred spectrum liability is estimated at Rs618bn in FY22E. Net cash excluding suppliers’ credit and deferred spectrum liability is estimated at Rs56bn in FY22E.  Net cash including suppliers’ credit and deferred spectrum liability is estimated at Rs153bn in FY23E, and that excluding it is estimated at Rs807bn in FY23.

Table 4: Net debt of Rs618bn estimated in FY22E and net cash at Rs153bn in FY23E including suppliers’ credit and deferred spectrum liability FY20 FY21 FY22E FY23E Gross debt 3,363 2,518 1,315 1,080 Cash & cash equivalents 1,753 2,142 1,371 1,886 Net debt 1,610 376 (56) (807) Suppliers’ credit 500 120 110 100 Deferred spectrum liability 188 188 565 554 Net debt + suppliers’ credit 2,299 685 618 (153) and deferred spectrum liability Source: I-Sec research

RIL continues to underperform

RIL has underperformed the market and peers since mid-Sep’20 After surge in share price up to mid-Sep’20, RIL has underperformed the market and peers across its businesses probably due to:  Weak net subscriber (sub) additions in Jun’20-Jan’21  No tariff hikes  Retail EBITDA and revenue below pre-covid levels until Q3 and hit by second wave of covid in Q1FY22  GRM weakness Tariff hike & retail growth at pre-covid level in FY23E may be triggers RIL’s stock performance is likely to improve if some or all of these triggers play out:  Tariff is hiked  Retail growth is back to pre-covid levels  There is strong GRM recovery  Stake in O2C is sold at a good valuation GRM recovery is likely to be slow as only 3.6m b/d refinery closures are announced vs 6m b/d needed. Q1 retail EBITDA was down 55% QoQ and a possible third wave may mean retail growth would be back to pre-covid level only in FY23E. A tariff hike and retail growth back to pre-covid level in FY23E may see RIL’s stock performance improve.

Reliance Industries, July 25, 2021 ICICI Securities

Chart 5: RIL outperformed all its Indian and Chart 6: Since 16-Sep’20, RIL underperformed all international peers in FY21 up to 16-Sep’20 Indian and international peers

Outperformance (31 Mar'20 - 16 Sep'20) Underperformance (16 Sep'20 - 23 Jul'21)

140% 131%131% 0% 107% 113% 112% 120% 101% 93% -20% 100% 84% 85% 85% 90% -16% -25% -23% 80% -40% -30% -29% 57% 57% 58% -39% 60% -44% 38% -60% -54% -52%-51% 40% -64% -62% -80% -69% 20% -71% 0% -100% -87% IOC IOC GAIL GAIL Trent Trent Apple Apple BPCL BPCL HPCL HPCL Dmart Dmart ABFRL ABFRL Google Google Amazon Amazon Walmart Walmart Microsoft Microsoft Facebook Facebook Bharti Airtel Bharti Airtel Bharti Shoppers Stop Shoppers Stop Shoppers

Source: Bloomberg, I-Sec research Source: Bloomberg, I-Sec research

RJio needs tariff hikes to offset higher cost inflation Network cost grew by 3.8% QoQ / 14.3% YoY to Rs60bn, which we believe will continue to rise from higher payment to tower and fiber InVITs. LF/SUC cost rose 8.8% QoQ on lower base in Q4FY21. Employee cost and SG&A cost dipped 2% and 7.9% QoQ. EBITDA grew 3.9% QoQ / 23% YoY to Rs86bn. However, depreciation and amortisation (D&A) cost rose only 3.3% to Rs31bn despite deployment of entire spectrum bought in Mar’21 auctions. Incremental cost rise in D&A suggests 14% of cost towards new spectrum has been recognised, and the remaining should be recognised in Q2FY22 and beyond. We believe the company needs tariff hikes to maintain earnings growth momentum, which we have built-in for H2FY22E.

Reliance Industries, July 25, 2021 ICICI Securities

Takeaways from Q1 investor meet and presentation

Key takeaways from RIL's Q1FY22 investor meet and presentation: Refining and petrochemicals  Domestic polymer demand was up 28% YoY but down 15% QoQ and at 96% of pre-covid level in Q1FY22. Domestic polymer demand was 75% of pre-covid (Q4FY20) demand in Q1FY21, surged to 113% or pre-covid demand in Q4FY21 but fell to 96% of pre-covid level in Q1FY22.  Polymer margins down QoQ but still above pre-covid levels: PVC margin was stable while PP and PE margins were down 6-13% QoQ. However, margins were 30-40% above pre-covid levels aided by global recovery and logistics constraints. Chart 7: Polymer domestic demand below pre-covid Chart 8: Polyester demand below pre-covid level, level, but margins above pre-covid in Q1FY22 but margins above pre-covid in Q1FY22

Source: Company data Source: Company data

 Domestic polyester demand up 203% YoY in Q1FY22 on a very low base, but down 30% QoQ hit by covid second wave. Domestic polyester demand was at just 28% of pre-covid level in Q1FY21, rebounded to 121% in Q4FY21, but fell to 84% of pre-covid levels in Q1FY22.  Polyester chain margins were above pre-covid level and also up QoQ and YoY. PX margins were up 25%, PET up 18% and POY up 20% QoQ.  RIL continued to operate at full capacity and petrochemical exports were boosted in Q1FY22 to ensure full placement of products.  Global cracker operating rates were at 82% in Q1FY22 vs 81% in Q4FY21  Global refining operating rates were at 76% in Q1FY22 vs 74% in Q4FY21  Global polyolefin new supply ahead of demand growth, but RIL expects strong Asia demand to absorb additional supply and international logistics constraints to support downstream margins.

Reliance Industries, July 25, 2021 ICICI Securities

Chart 9: Demand revival and international logistics Chart 10: Further restrictions due to third wave may constraint likely to support margins in near term delay demand recovery to pre-covid levels

Source: Company data Source: Company data

Retail  Retail EBITDA up 29% YoY, but down 55% QoQ; core EBITDA down 62% QoQ: Retail’s Q1FY22 EBITDA excluding investment income of Rs5.51bn was up 29% YoY, but down 55% QoQ with margin at 3.6% vs 3.4% in Q1FY21 and 6.6% in Q4FY21. Its core EBITDA was up 43% YoY but down 62% QoQ with margin at 5.1% vs 5.9% in Q1FY21 and 9.3% in Q4FY21 (we have assumed connectivity EBITDA margin at 2%, in line with past trends).

Chart 11: Total & core retail revenues up 22-66% Chart 12: Total and core retail EBITDA up 29-43% YoY in Q1FY22; down 18-31% QoQ YoY in Q1FY22; down 55-62% QoQ

Total revenue Core revenue Total EBITDA Core EBITDA Total YoY change % Core YoY change % Total YoY change % Core YoY change % 35 60% 500 80% 450 66% 30 29% 40% 60% 21% 43% 400 50% 25 20% 350 40% 25% bn) bn)

- - 20 0% 300 23% 22% 20% -14% -15%

(Rs 250 (Rs 15 -20% 200 0% 0% -47% -20% -19% 150 -17% -17% -17% -20% 10 -40% 100 -30% 5 -59% -60% -43% -40% 50 316 122 411 204 378 190 471 294 385 202 11 7 20 16 23 19 31 27 14 10 0 -60% 0 -80% Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

Source: Company data, I-Sec research Source: Company data, I-Sec research

 Q1FY22 net profit up 123% YoY (also boosted by investment income), but down 57% QoQ.  Digital + new commerce contributed 20% of core revenue in Q1FY22 vs 4% in Q1FY21  YoY growth driven by consumer electronics and Fashion & Lifestyle: Retail revenues were up 22% YoY, but down 18% QoQ in Q1FY22, with core revenues up 66% YoY but down 31% QoQ (we have assumed connectivity revenues to be

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2% higher than RJio’s revenues in line with past trends). QoQ fall in revenues was due to restricted store operations and lower footfalls, but YoY rise was driven by consumer electronics and Fashion & Lifestyle (F&L) segment with:  Consumer electronics revenue up 1.8x YoY with broad-based double-digited growth across categories and highest ever quarterly sales recorded from www.reliancedigital.in  Lower footfalls in consumer electronics partly offset by higher conversions, larger ticket sizes, omni-channel promotions, financing tie-ups, exchange offers and new launches  3x YoY rise in apparel and footwear revenues and 4x YoY rise in AJIO tariff, monthly active users (MAU) and orders  500 labels launched in F&L taking own brands share up to 27%  2.5x YoY surge in jewels revenues on higher operational days and better product mix Chart 13: Footfalls dropped to 46% of pre-covid Chart 14: Priorities for FY22 to open new stores and levels in Q1FY22 vs 88% in Q4FY21 accelerate digital commerce

Source: Company data, I-Sec research Source: Company data, I-Sec research

 Grocery segment witnessed double-digited YoY growth but QoQ performance was impacted by operating restrictions. JioMart orders were up 25% QoQ with high repeat orders (over 70-75% repeat orders).  Store opening halted due to second wave of covid: RRVL’s store addition slowed down in Q1FY22 due to second wave of covid with 123 stores added vs 826 in Q4FY21. The number of total stores stands at 12,803 and their total area at 34.5mn-sqft.  Q1 hit by restricted operations and lower footfalls; Jul’21 not yet at Apr levels: Footfalls in stores stood at 46% of pre-covid levels in Q1FY22 vs 88% in Q4FY21, 75% in Q2-Q3FY21 and 43% in Q1FY21. Similarly, 61% of stores were operational in Q1FY22 vs 94% in Q4FY21, 96% in Q3, 85% in Q2 and 50% in Q1FY21. Store operations in Jul’21 have recovered, but are yet to reach Apr’21 levels (70% operating store hours).  RRVL’s key priorities for retail in FY22 are stepping up pace of new stores opening, accelerate digital commerce, and expand category play on JioMart. It also

Reliance Industries, July 25, 2021 ICICI Securities

plans to scale up own brands including recent acquisitions (Urban Ladder and Zivame). Reliance Jio Infocomm (RJio)  RJio revenues grew 3.7% QoQ: In Q1FY22, revenues grew to Rs180bn, up 3.7% QoQ / 8.7% YoY (L2L: +18% YoY, adjusted for IUC impact). This was driven by continued strong sub addition of 14.4mn to 441mn, on a base of 15.4mn addition in Q4FY21. However, ARPU was flattish at Rs138 QoQ, despite an additional day and growing FTTH subs who bring in much higher ARPU. This can be attributed to higher Jiophone addition, which has much lower ARPU, and impact on recharges due to lockdown. We expect ARPUs to grow from Q2FY22 onwards with normalisation. RJio’s revenues, adjusted for IUC, grew 30% YoY in Q4FY21 and 19% in Q1FY22, which means IUC revenues were at Rs17bn and Rs15.8bn for the two periods. We are surprised at the IUC revenue decline despite 2.9% QoQ growth in minutes. Table 5: Reliance Jio (standalone) financials (Rs mn) Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 QoQ (%) YoY (%) Revenue 1,65,570 1,74,810 1,84,920 1,73,580 1,79,940 3.7 8.7 Network operation cost 52,250 54,260 56,530 57,540 59,730 3.8 14.3 % of revenue 31.6 31.0 30.6 33.1 33.2 Access charges 13,930 15,100 15,490 1,790 1,700 (5.0) (87.8) % of revenue 8.4 8.6 8.4 1.0 0.9 License fees and spect charges 18,180 19,460 20,390 19,520 21,240 8.8 16.8 % of revenue 11.0 11.1 11.0 11.2 11.8 Employee cost 3,180 3,310 3,430 3,450 3,380 (2.0) 6.3 % of revenue 1.9 1.9 1.9 2.0 1.9 SGA and other exp 7,980 7,640 7,940 8,380 7,720 (7.9) (3.3) % of revenue 4.8 4.4 4.3 4.8 4.3 EBITDA 70,050 75,040 81,140 82,900 86,170 3.9 23.0 EBITDA margin (%) 42.3 42.9 43.9 47.8 47.9 Depreciation and amortisation 27,380 28,710 29,100 30,150 31,150 3.3 13.8 EBIT 42,670 46,330 52,040 52,750 55,020 4.3 28.9 Interest 11,680 10,220 8,500 8,000 8,210 2.6 (29.7) Other income 2,760 1,970 520 230 140 PBT 33,750 38,080 44,060 44,980 46,950 4.4 39.1 Provision for tax 8,550 9,640 11,150 11,380 11,940 4.9 39.6 Effective tax rate (%) 25.3 25.3 25.3 25.3 25.4 Exceptions - - - - - Net income (reported) 25,200 28,440 32,910 33,600 35,010 4.2 38.9 Source: Company data, I-Sec research

 Engagement metrics have improved: Churn rate dipped to 0.9% (vs 1.3% in Q4FY21) improving its sub retention rate, while gross sub addition dipped to 26.7mn (from 31.2mn in Q4FY21). Minutes grew 2.9% QoQ / 19.6% YoY to 1,063- bn, and data usage rose sharply by 21.9% QoQ / 43% YoY to 20,340-bn GB. Company attributed the increase to better network quality from deployment of new spectrum bought in the Mar’21 auctions.  Network cost inflation sustained: Network cost grew 3.8% QoQ / 14.3% YoY to Rs60bn, and likely to rise further due to payments to tower and fibre InVITs. LF/SUC cost rose 8.8% QoQ on the lower base of Q4FY21. Employee and SG&A costs dipped 2% and 7.9% QoQ. EBITDA grew 3.9% QoQ / 23% YoY to Rs86bn. However, depreciation and amortisation (D&A) rose only 3.3% to Rs31bn despite deployment of the entire spectrum bought in Mar’21 auctions. Incremental rise in D&A suggests 14% of the cost towards new spectrum was recognised in Q1FY22, and the remaining should be recognised in Q2FY22 and beyond. Similarly, interest cost rose 2.6% QoQ to Rs8.2bn, which also suggests interest cost for the entire

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deferred spectrum liability was not captured in Q1FY22. Net profit grew 4.2% QoQ to Rs35bn. Table 6: Reliance Jio (standalone): ARPU flattish QoQ; subs growth during lockdown was impressive Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 QoQ (%) YoY (%) Subscribers (mn) 398 406 411 426 441 3.4 10.6 Net adds (mn) 10.8 7.3 5.2 15.4 14.4 Gross adds (mn) 15.1 27.2 25.1 31.2 26.7 ARPU (Rs) 140 145 151 138 138 0.1 (1.4) Inc. ARPU (Rs) 406 340 539 (367) 142 (138.8) (64.9) Churn (%) 0.4 1.7 1.6 1.3 0.9

Minutes of Use (min/subs) 755 773 796 823 818 (0.6) 8.4 Minutes on Network (mn) 8,89,440 9,32,230 9,74,960 10,33,277 10,63,564 2.9 19.6

Data usage per sub (MB) 12,047 11,958 12,951 13,286 15,644 17.8 29.9 Data volume (mn MB) 1,42,00,000 1,44,20,000 1,58,60,000 1,66,80,000 2,03,40,000 21.9 43.2 Source: Company data, I-Sec research  Jio Platform EBITDA dip 2.8% QoQ / 16% YoY to Rs2.8bn: RJio’s subs addition has been healthy, and Jio Platforms (standalone, which houses most of the digital properties) has also grown strong at 4.1% QoQ / 37.4% YoY to Rs9.6bn in Q1FY22. But, it has been flattish to declining in past four quarters which is disappointing. Moreover, Jio Platforms’ EBITDA has dipped.  RJIO remain optimistic on JioFiber: JioFiber customers grew to 3mn in Q1FY22; however, it expects the sub-base to rise rapidly post-covid with ‘fiber homepass’ currently at 12mn. The addition has remained under 0.6mn per quarter since the new lower tariff plans were launched. E&P update  Oil & gas revenues at 10-quarter high; EBITDA at 22-quarter high: RIL’s oil and gas segment revenues were at 10-quarter high in Q1FY22 led by improved price realisation for CBM and US Shale, and EBITDA at 22-quarter high driven by ramp- up in KG-D6 production. EBTIDA was up 66% QoQ and margin expanded by 560bps QoQ.  KG-D6 production ahead of plan; 18mmscmd of gas contracted: RIL’s R- cluster field had commenced production in Dec’20 and has reached peak production of ~12.8mmscmd in mid-Apr’21, ahead of plan. Satellite cluster too has commenced production in Apr’21 (two months ahead of plan). RIL has completed 3 rounds of bidding and successfully tied up 18mmcmd of KG-D6 gas so far.  First gas from MJ field expected by Q3FY23: First offshore installation campaign has been completed at MJ field in KG-D6 basin. Second offshore installation campaign is expected to commence from Nov’21 and first gas from the field is expected by Q3FY23. RIL targets a combined production of 30mmscmd from the three fields of KG-D6 (R-cluster, Satellite and MJ field) by 2023.

RIL's gross and net consolidated debt  Consolidated net debt at Rs228bn in Jun’21, down from Rs376bn in Mar’21: RIL’s net debt excluding suppliers’ credit and deferred spectrum liability was down to Rs228bn in Jun’21 from Rs376bn in Mar’21. However, accounting for Rs565bn of deferred liability on spectrum bought in Mar’21 and suppliers’ credit of Rs120bn, net debt was higher at Rs913bn in Jun’21.

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Table 7: RIL’s net debt excluding & including suppliers’ credit / deferred spectrum liability at Rs228bn-913bn in Jun’21 vs Rs376bn-685bn in Mar’21 Rs-bn FY20 FY21 Jun’21 Gross debt 3,363 2,518 2,539 Cash & cash equivalents 1,753 2,142 2,311 Net debt 1,610 376 228 Suppliers’ credit 500 120 120 Deferred spectrum liability 188 188 565 Net debt + suppliers’ credit and deferred spectrum liability 2,299 685 913 Source: Company data, I-Sec research

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Q1FY22 PBT up 111% YoY but EPS up 48% YoY

Q1 recurring EPS up 48% YoY, but down 1% QoQ

Q1 recurring EPS up 48% YoY driven by EBITDA rise and interest fall Q1FY22 consolidated recurring PBT was up 111% YoY, but recurring EPS was up just 48% YoY due to 13.3x YoY surge in tax on normalisation to Rs34.6bn vs just Rs2.6bn in Q1FY21 (tax/PBT at 20% in Q1FY22 vs just 3% in Q1FY21). The main drivers of Q1 earnings rise were:  38% YoY rise in consolidated EBITDA  50% YoY fall in interest cost to Rs34bn Table 8: Q1FY22 consolidated recurring EPS up 48% YoY; PBT up 111% YoY (Rs mn, year ending March 31) Q1FY22 Q1FY22 Change Q4FY21 Change Net sales 14,43,720 9,12,380 58% 15,48,960 -7% Total expenditure 12,10,040 7,43,630 63% 13,15,450 -8% EBITDA 2,33,680 1,68,750 38% 2,33,510 0% EBITDA margin 16.2% 18.5% 15.1% Interest 33,970 67,350 -50% 40,440 -16% Depreciation 68,830 63,080 9% 69,730 -1% Interest Income 25,670 27,920 -8% 22,410 15% Other Income 16,520 15,960 4% 9,960 66% PBT 1,73,070 82,200 111% 1,55,710 11% Tax 34,640 2,600 1232% 13,870 150% Minority Interest 15,330 150 17,680 -13% Share of profit of associates -370 3,220 NM 140 NM Recurring consolidated PAT 1,22,730 82,670 48% 1,24,300 -1% Extra-ordinary items 49,660 7,970 Reported consolidated PAT 1,22,730 1,32,330 -7% 1,32,270 -7%

Recurring EPS 19.0 12.8 48% 19.3 -1% Reported EPS 19.0 20.5 -7% 20.5 -7% Source: Company data, I-Sec research

Q1 beat due to higher other income, lower tax, DD&A & interest cost Q1FY22 EPS was 13% higher than our expectation, despite EBITDA being 4% below our estimate, due to:

 Other income and interest income being 14% higher than our estimate at Rs42.2bn.  Depreciation being 8% lower than our estimate at Rs68.8bn.

 Interest cost being 15% lower than our estimate at Rs34bn.

 Tax being 9% lower than our estimate at Rs34.6bn. Despite PBT being 4% higher than our estimate, tax was 9% below estimate as tax/PBT was lower at 20% vs our estimate of 23%.

Reliance Industries, July 25, 2021 ICICI Securities

Table 9: Q1FY22 standalone recurring EPS up 76% YoY; PBT up 160% YoY (Rs mn, year ending March 31) Q1FY22 Q1FY21 Change Q4FY21 Change Net sales 9,05,700 5,04,460 80% 8,59,770 5% Total expenditure 7,91,100 4,33,350 83% 7,57,840 4% EBDITA 1,14,600 71,110 61% 1,01,930 12% EBDITA margin 12.7% 14.1% 11.9% Interest 23,510 52,510 -55% 30,010 -22% Depreciation 25,090 21,750 15% 25,820 -3% Interest Income 27,740 30,070 -8% 24,760 12% Other Income 8,140 12,340 -34% 3,210 154% PBT 1,01,880 39,260 160% 74,070 38% Current tax 15,930 -9,480 -268% -2,100 -859% Recurring PAT 85,950 48,740 76% 76,170 13% Exceptional item 0 44,200 0 Reported PAT 85,950 92,940 -8% 76,170 13% Recurring EPS 13.3 7.6 76% 11.8 13% Reported EPS 13.3 14.4 -8% 11.8 13% Source: Company data, I-Sec research

EBITDA up 38% YoY as rise across segments on a low base RIL’s Q1 EBITDA was up 38% YoY while segment EBITDA rose 35% YoY driven by:  29% YoY rise in retail EBITDA to Rs14bn (excluding investment income of Rs5.5bn). Retail EBITDA was down 55% QoQ due to lockdowns caused by the second wave of covid hurting operations  19% YoY rise in digital services EBITDA to Rs92.7bn  50% YoY rise in O2C EBITDA. We estimate petrochemical EBITDA to be up 2.3x YoY to an all-time high, but refining EBITDA to be down 44% YoY.  Oil and gas EBITDA in the black at Rs8.0bn vs loss of Rs320mn in Q1FY21

Table 10: Q1FY22 consolidated segment EBITDA up 35% YoY driven by 19-29% YoY rise in retail and digital services EBITDA, and 50% YoY rise in O2C EBITDA (Rs mn) Q1FY22 Q1FY21 Change Q4FY21 Change Petrochemicals 1,01,542 44,300 129% 90,290 12% Refining 20,768 37,360 -44% 23,780 -13% O2C 1,22,310 81,660 50% 1,14,070 7% Oil & gas 7,970 -320 4,800 66% Retail 14,020 10,880 29% 30,890 -55% Digital services 92,680 78,030 19% 89,450 4% Financial services 1,320 3,800 -65% 1,440 -8% Others 14,130 12,780 11% 11,640 21% EBITDA (excluding 2,52,430 1,86,830 35% 2,52,290 0% unallocated) Source: Company data, I-Sec research

Q1 EBITDA 4% below expectation; miss on retail but beat in oil & gas Q1FY22 consolidated EBITDA was 4% and segment EBITDA 3% below our estimate with performance vs our estimates in various segments as follows:  Retail EBTIDA at Rs14bn (excluding investment income of Rs5.5bn) was 36% below our estimate of Rs22bn.  Oil & gas EBITDA at Rs8bn (our estimate: Rs4.8bn) was 65% (Rs3.1bn) above our expectation mainly due to KG-D6 new fields’ opex at US$1.4/mmbtu being sharply lower than our estimate US$3/mmbtu. Domestic/standalone oil & gas EBITDA was therefore 80% (Rs2.9bn) above our estimate at Rs6.56bn.

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O2C EBITDA was largely in line with reported EBITDA being Rs122.3bn vs our estimate of Rs123bn. Digital EBITDA was also largely in line with reported being Rs92.7bn vs our estimate of Rs93.2bn.

Table 11: Q1FY22 standalone segment EBITDA up 54% YoY driven by 51% YoY rise in O2C EBITDA (Rs mn) Q1FY22 Q1FY21 Change Q4FY21 Change Petrochemicals 1,00,000 43,250 131% 90,000 11% Refining 18,980 35,370 -46% 22,150 -14% O2C 1,18,980 78,620 51% 1,12,150 6% Oil & gas 6,560 70 9271% 3,310 98% Retail 120 90 80 50% Digital services 2,600 2,160 1,520 71% Financial services 3,120 4,470 2,310 35% Others -10 10 -200% 30 -133% EBITDA (excluding 1,31,370 85,420 54% 1,19,400 10% unallocated)

Reported GRM (US$/bbl) 4.5 6.3 -29% 4.8 -7% Crude throughput (MMT) 17.0 16.6 2% 17.1 -1% Brent (US$/bbl) 68.6 31.4 118% 60.7 13% Exchange rate (INR-USD) 73.7 75.9 -3% 72.9 1% Source: Company data, I-Sec research Note: Reported GRM in Q4FY21-Q1FY22 are our estimate

Reliance Industries, July 25, 2021 ICICI Securities

Risks

The main risks to our HOLD rating and investment thesis are:

 Jio Platforms Ltd (JPL) emerging as a successful digital services platforms company and being valued much higher than by us. We are valuing it at Rs496bn (US$6.8bn) based on 15x FY23E EBITDA. Music app JioSaavn, in which RIL invested in 2018, may enjoy a high valuation as its subscribers, advertisement and subscription revenues and EBITDA grows; its global peer Spotify, which had revenues of US$9bn and EBITDA loss of ~US$350m in CY20, has a market cap of US$53bn.

Chart 15: JPL has many apps like JioSaavn, tech Chart 16: Next phase of growth is expected to be capabilities & is investing in creating an ecosystem driven by a multitude of digital services platforms

Source: Company data, I-Sec research Source: Company data, I-Sec research

 Higher or lower ARPU than estimated. We estimate rise in RJio’s ARPU by 10% YoY in FY22E, 10% YoY in FY23E, 8% YoY in FY24E, 6% YoY in FY25E and 5% YoY in FY26E to Rs208 in FY26E. Upside to fair value (FV) would be Rs55/share if ARPU rise is 10% YoY, and Rs144/share if ARPU rise is 15% YoY in FY24E- FY26E.

 Any significant delay in return to normalcy may mean lower growth in retail than estimated. Second wave of covid in India, which led to reimposition of restrictions, impacted retail segment operations in Q1FY22. Store operations in Jul’21 are not yet back to Apr’21 levels. Moreover, a risk of third wave looms, which may mean RIL’s retail revenue and earnings are lower than estimated. Downside to FV would be Rs56/share if retail revenue growth in FY22E and FY23E is 5 pct points lower than in base case,

 GRM being lower than assumed: Slow vaccine rollout, surge in covid cases and reimposition of lockdowns in Europe in particular and some other countries too, threaten to delay global demand recovery. This may mean slower recovery in GRMs and RIL’s GRM being lower than estimated. However, slower recovery in global demand and weaker GRM for longer period may also hasten decision on refinery closures; in this scenario rebound in GRMs may be stronger though a little later than estimated. Downside to FV would be Rs41/share if FY23E GRM is

Reliance Industries, July 25, 2021 ICICI Securities

US$1/bbl lower than estimated. It would be lower by Rs103/share if GRM is US$6/bbl vs US$8.5/bbl in the base case.

 Petrochemical EBITDA being lower or higher than estimated. Large capacity additions of PE, PP, PX, PTA and MEG are likely to hurt petrochemical margins, which may mean downside to RIL’s petrochemical EBITDA. We have therefore estimated RIL’s petrochemical EBITDA to be down 11% YoY in FY23E. Hurricanes can cause prolonged shutdown of US Gulf coast petrochemical capacity thereby boosting margins as was the case in CY20 due to hurricane Laura. Downside to FV would be Rs34/share if FY23E petrochemical EBITDA is 10% lower than estimated.

Table 12: If ARPU rise is higher at 10-15% in FY24E-FY26E, FV will be higher at Rs2,073-2,162/share implying 2% downside and 3% upside to share price Upside/ Upside/downside FV downside vs Change in RIL's FV if to FV (Rs/share) (Rs/share) CMP ARPU rise 10% YoY in FY24-26E vs 8-5% base case 55 2,073 -2% ARPU rise 15% YoY in FY24-26E vs 8-5% base case 144 2,162 3% Retail revenue growth 5 pct points lower than base case (56) 1,962 -7% FY23E GRM US$1/bbl lower than estimated (41) 1,976 -6% FY23E GRM US$6/bbl vs US$8.5/bbl in the base case (103) 1,915 -9% FY23E petrochemical EBITDA 10% lower than base case (34) 1,983 -6% Source: Company data, I-Sec research

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Financial summary

Table 13: Profit and Loss statement Table 16: Cashflow statement (Rs bn, year ending March 31) (Rs bn, year ending March 31) FY20 FY21 FY22E FY23E FY20 FY21 FY22E FY23E Operating Income (Sales) 6,124 4,863 7,730 8,752 Operating Cashflow before 473 627 1,006 1,298 Operating Expenses 5,234 4,056 6,623 7,384 working capital changes EBITDA 890 807 1,107 1,368 Working Capital Changes 1,241 -596 -781 164 % margins 14.5% 16.6% 14.3% 15.6% Operating Cashflow 1,715 31 225 1,462 Depreciation & Amortisation 222 266 325 365 Capital Commitments -815 -520 -508 -630 Gross Interest 220 212 137 93 Free Cashflow 900 -489 -283 832 Other Income 132 163 140 174 Cashflow from Investing Activities -1,985 -1,797 107 -830 Recurring PBT 536 555 792 1,090 Issue of Share Capital (inc. 4 133 395 0 Less: Taxes 137 17 184 242 Buyback impact) Net Income (Reported) 394 491 536 754 Inc (Dec) in Borrowings 242 -1,355 -356 -231 Recurring Net Income 438 435 536 754 Dividend paid -44 -44 -51 -66 Source: Company data, I-Sec research Cashflow from Financing Activities 203 -1,266 -12 -297 Chg. in Cash & Bank balances -68 -3,033 320 335 Source: Company data, I-Sec research Table 14: Balance sheet (Rs bn, year ending March 31) Table 17: Key ratios FY20 FY21 FY22E FY23E Assets (Year ending March 31) Total Current Assets 1,572 1,594 1,895 2,285 FY20 FY21 FY22E FY23E of which cash & cash eqv. 1,753 2,142 1,371 1,886 Per Share Data (Rs) Total Current Liabilities & EPS(Basic Recurring) 73.9 67.5 83.1 117.1 2,453 2,021 1,711 1,951 Provisions Diluted Recurring EPS 73.9 67.5 83.1 117.1 Net Current Assets -881 -428 183 334 Recurring Cash EPS 102.4 108.7 133.5 173.6 Investments 3,669 4,946 4,331 4,531 Dividend per share (DPS) 6.5 7.0 9.0 9.0 Net Fixed Assets 5,327 5,413 5,370 5,670 Book Value per share (BV) 765.0 1,086.4 1,220.6 1,327.4 Capital Work-in-Progress 1,091 1,260 1,485 1,450 Total Assets 9,206 11,191 11,370 11,986 Growth Ratios (%) Operating Income 5% -21% 59% 13% Liabilities EBITDA 6% -9% 37% 24% Borrowings 4,051 2,826 1,990 1,734 Recurring Net Income 12% -1% 23% 41% Deferred Tax Liability 541 370 449 539 Diluted Recurring EPS 12% -9% 23% 41% Equity Share Capital 63 64 64 64 Diluted Recurring CEPS 10% 6% 23% 30% Face Value per share (Rs) 11 12 12 12 Reserves & Surplus* 4,073 6,408 6,878 7,566 Valuation Ratios (x) Minority Interest 80 993 1,065 1,158 P/E 28.5 31.2 25.3 18.0 Net Worth 4,533 7,002 7,867 8,555 P/CEPS 20.6 19.4 15.8 12.1 Total Liabilities 9,206 11,191 11,370 11,986 P/BV 2.8 1.9 1.7 1.6 *excluding revaluation reserves EV / EBITDA 18.2 20.1 14.0 10.9 Source: Company data, I-Sec research EV / Operating Income 20.3 23.0 16.8 12.7 EV / Operating FCF 9.5 526.2 69.2 10.2

Table 15: Quarterly trend Operating Ratios (Rs bn, year ending March 31) Other Income / PBT (%) 25% 29% 18% 16% Effective Tax Rate (%) 26% 3% 23% 22% Sep-20 Dec-20 Mar-21 Jun-21 NWC / Total Assets (%) -10% -4% 2% 3% Net sales 1,162 1,240 1,549 1,444 D/E Ratio (%) 89% 40% 25% 20% % growth (YoY) (24) (21) 11 58 EBITDA 189 216 234 234 Return/Profitability Ratios (%) Margin (%) 16.3 17.4 15.1 16.2 Recurring Net Income Margins 7% 9% 7% 8% Other income 42 45 32 42 RoCE 7% 6% 6% 7% Net profit 96 132 124 123 RoNW 10% 8% 7% 9% Source: Company data, I-Sec research Dividend Payout Ratio 10% 12% 12% 9% Dividend Yield 0.3% 0.3% 0.4% 0.4% EBITDA Margins 15% 17% 14% 16% Source: Company data, I-Sec research

Reliance Industries, July 25, 2021 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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