Equity Research 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 2 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. 3 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.