India Equity Research Oil & Gas July 24, 2021 RELIANCE INDS. RESULT UPDATE KEY DATA Stepping on the gas Rating HOLD Sector relative Neutral Price (INR) 2,106 12 month price target (INR) 2,175 Reliance Industries (RIL) posted Q1FY22 EBITDA of INR257bn (up 38% Market cap (INR bn/USD bn) 13,794/185.2 YoY, flat QoQ) broadly in line with our estimate, and PAT of INR147bn Free float/Foreign ownership (%) 50.9/24.2 What’s Changed (up 46% YoY, down 1.1% QoQ). While O2C beat our expectations, Target Price Rating/Risk Rating ⚊ Retail is a big miss. Jio Platforms’ performance is modest while ahead- of-schedule ramp-up in KG-D6 gas production is a big accelerator. QUICK TAKE We reckon the upstream business is poised to drive INR100bn growth Above In line Below in EBITDA by FY23E while refining margins are likely to recover. RIL’s Profit Margins latest INR750bn path-breaking “New Energy” investment plan towards Revenue green hydrogen and fuel cells should enable O2C to become carbon- Growth neutral by 2035. Maintain ‘HOLD’ as a rollover to Q2FY23E edges up Overall TP by 3% to INR2,175 at 9.7x EV/EBITDA . FINANCIALS (INR mn) Polymers drive O2C beat; KG-D6 gas ramp-up ahead of schedule Year to March FY20A FY21E FY22E FY23E O2C EBITDA surged 48% YoY, and improved 7.2% QoQ. As PP, PE and PVC prices Revenue 59,67430 46,69240 66,98817 79,72388 remain strong, downstream margins stood high with product deltas near or above EBITDA 8,82,170 8,07,370 11,14389 13,82304 Adjusted profit 3,93,540 4,91,280 5,28,842 6,79,723 five-year averages. Polymer domestic demand grew 28% YoY with sustained demand Diluted EPS (INR) 62.1 76.2 78.2 100.5 from essential sectors, e.g. food and FMCG packaging, and e-commerce packaging. EPS growth (%) (7.1) 22.8 2.6 28.5 Refining throughput remains flat YoY/QoQ led by utilisation of 106.5% on channel RoAE (%) 10.4 8.5 8.8 9.2 restocking. KG-D6 satellite cluster gas production commenced in Apr-21, two P/E (x) 33.9 27.6 26.9 20.9 months ahead of plan. Combined production from the R-cluster and Satellite cluster EV/EBITDA (x) 17.8 19.7 14.9 9.7 Dividend yield (%) 0.3 0.3 0.4 0.7 is ~18mmscmd. MJ fields will start from Q3FY23. Retail a big miss; subscribers additions offset muted RJio ARPU PRICE PERFORMANCE While Retail’s EBITDA rose 80% YoY (-46% QoQ), adjusted for the INR5.5bn 2,325 54,000 investment income, it grew 29% YoY (-55% QoQ). Only 61% of stores are operational 2,225 50,400 (94% in Q4FY21, 50% in 1QFY21) and footfalls plunged to 46% (88% in Q4FY21, 43% 2,125 46,800 in 1QFY21). Electronics & lifestyle clocked strong traction. JioMart has been 2,025 43,200 extended to 218 cities with ~415 total integrated stores. While RJio’s digital services 1,925 39,600 1,825 36,000 EBITDA rose 32% YoY (+3.6% QoQ), its ARPU slid 1.4% to INR138 (flat QoQ). Net Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 subscriber additions stood at 15mn (total 440mn). Meanwhile, RJio is adequately RIL IN Equity Sensex prepared to roll out the 5G network as spectrum becomes available. Outlook: Diluted Retail, RJio PAT attributable to RIL; retain ‘HOLD’ Explore: Following a 33% stake sale, RJio’s PAT attributable to RIL rose 24% YoY for RJio versus standalone RJio growth of 39% YoY. Similarly, a 10% stake sale in Retail diluted standalone growth of 123% YoY to 100% YoY attributable to RIL. RJio and Retail contributed 26% to RIL’s PAT. Reiterate ‘HOLD/SN’ with a 3% TP hike to INR2,175. Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 15,44,390 8,82,530 75.0 14,95,750 3.3 EBITDA 2,57,940 1,86,830 38.1 2,57,830 0 Adjusted Profit 1,46,990 1,00,750 45.9 1,48,620 (1.1) Video Corporate access Diluted EPS (INR) 22.4 15.6 43.6 23.1 (2.7) Jal Irani Shubham Mittal Iqbal Khan +91 (22) 6620 3087 +91 (22) 4063 5459 [email protected] [email protected] [email protected] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited RELIANCE INDS. Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 59,67,430 46,69,240 66,98,817 79,72,388 Share capital 63,392 64,450 67,616 67,616 Gross profit 19,15,030 17,42,230 18,98,843 23,91,298 Reserves 44,69,920 70,36,530 76,75,602 83,39,278 Employee costs 1,40,750 1,48,170 1,48,481 1,64,609 Shareholders funds 45,33,312 71,00,980 77,43,218 84,06,894 Other expenses 8,92,110 7,86,690 6,35,972 8,44,384 Minority interest 80,160 1,27,314 1,62,879 2,07,514 EBITDA 8,82,170 8,07,370 11,14,389 13,82,304 Borrowings 32,95,250 24,53,280 21,36,163 19,77,533 Depreciation 2,22,030 2,65,720 3,31,720 4,04,830 Trade payables 9,67,990 10,88,970 9,79,029 10,61,335 Less: Interest expense 2,20,270 2,11,890 1,87,816 1,95,772 Other liabs & prov 24,67,290 21,26,426 19,27,821 21,45,561 Add: Other income 1,39,560 1,63,270 1,49,852 1,82,715 Total liabilities 1,16,59,152 1,32,12,120 1,32,64,260 1,41,13,988 Profit before tax 5,79,430 4,93,030 7,44,706 9,64,417 Net block 43,59,200 45,10,660 45,94,108 46,11,348 Prov for tax 1,37,260 17,220 1,85,458 2,40,059 Intangible assets 9,67,380 9,01,920 15,88,674 15,78,139 Less: Other adj 0 0 0 0 Capital WIP 10,91,060 12,59,530 1,63,208 1,63,208 Reported profit 4,37,980 4,34,860 5,28,842 6,79,723 Total fixed assets 64,17,640 66,72,110 63,45,991 63,52,695 Less: Excp.item (net) 0 0 0 0 Non current inv 20,38,520 21,23,820 18,58,520 18,58,520 Adjusted profit 3,93,540 4,91,280 5,28,842 6,79,723 Cash/cash equivalent 10,38,350 16,98,430 23,89,242 30,25,418 Diluted shares o/s 6,339 6,445 6,762 6,762 Sundry debtors 1,96,560 1,90,140 2,10,459 2,31,576 Adjusted diluted EPS 62.1 76.2 78.2 100.5 Loans & advances 2,24,010 25,490 8,33,530 9,11,705 DPS (INR) 6.5 7.0 9.1 15.1 Other assets 17,44,072 25,02,130 18,06,479 19,14,035 Tax rate (%) 23.7 3.5 24.9 24.9 Total assets 1,16,59,152 1,32,12,120 1,32,64,260 1,41,13,988 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Brent crude prices 60.9 44.8 62.0 65.0 Reported profit 4,37,980 4,34,860 5,28,842 6,79,723 ($/bbl) Add: Depreciation 2,22,030 2,65,720 3,31,720 4,04,830 GDP (%) 4.8 (6.0) 7.0 6.0 Interest (net of tax) 1,68,091 2,04,489 1,41,043 1,47,041 USD/ INR 70.7 75.0 73.0 72.0 Others (3,53,808) (4,89,557) 11,596 10,792 EBITDA margin (%) 14.8 17.3 16.6 17.3 Less: Changes in WC 5,06,678 (1,53,662) 5,18,540 72,809 Net profit margin (%) 6.6 10.5 7.9 8.5 Operating cash flow 9,80,970 2,61,850 15,31,741 13,15,196 Revenue growth (% YoY) 5.2 (21.8) 43.5 19.0 Less: Capex 7,65,170 10,58,370 9,54,890 4,11,534 EBITDA growth (% YoY) 5.1 (8.5) 38.0 24.0 Free cash flow 2,15,800 (7,96,520) 5,76,851 9,03,662 Adj. profit growth (%) (0.6) 24.8 7.6 28.5 Key Ratios Assumptions (%) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E RoE (%) 10.4 8.5 8.8 9.2 GDP (%) 4.8 (6.0) 7.0 6.0 RoCE (%) 10.6 8.0 9.5 11.2 Petchem EBITDA ($/ mt) 138 159 130 135 Inventory days 64 97 62 55 USD/ INR 70.7 75.0 73.0 72.0 Receivable days 15 15 11 10 Chemical prod (mmt) 31.6 32.5 33.4 36.3 Payable days 92 128 79 67 Retail area (mn sq ft) 28.7 31.6 34.7 39.9 Working cap (% sales) (12.2) (2.7) 5.9 4.6 No.