Reliance Industries - Rebound from lows, but headwinds continue - ICICI Securities

Reliance Industries' (RIL) Q1FY22 recurring EPS was up 48% YoY (PBT up 111%, but tax up 13.3x on normalisation) driven by rise in EBITDA across segments and 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 of cut in O2C and retail EBITDA by 6-25%, raising oil & gas and digital EBITDA by 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 wave delaying retail recovery may mean more downside to FY22E EPS. Stock underperformance continues and will continue unless there is a tariff hike, retail growth is back to pre-covid levels, or GRM recovers. Retain HOLD.

- Q1 up YoY on low base: Q1FY22 consolidated recurring EPS was up 48% YoY vs PBT jump of 111% YoY on 13.3x YoY surge in tax. Q1 was driven by: 1) 19-29% 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 Rs8bn vs Rs320m loss in Q1FY21; and 4) 50% YoY fall in interest cost.

- Cut FY22E EPS by 1%; more downside possible: We have cut FY22E: 1) retail EBITDA by 25% to Rs102bn (up 20% YoY), and 2) O2C EBITDA by 6% to Rs497bn (up 30% YoY). However, we have: 1) raised oil & gas EBITDA by 120% to Rs55bn on 53% cut in KG D6 opex (based on Q1), 15% upgrade in KG D6 volume, 7% higher KG D6 gas price, and 9-28% higher oil & gas price for US shale operations; 2) raised digital EBITDA by 1% (30mn net subs rise vs 20mn); and 3) cut DD&A by 5% to factor-in the Q1 trend. The net impact is cut in FY22E EPS by 1% and target price by 1% to Rs2,017 (4% downside). Further downside to our FY22E EPS is possible if: 1) GRM is lower than our revised estimate of US$6/bbl; 2) petrochemical margins fall 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 meant upgrade in FY23E oil & gas EBITDA by 105% and EPS by 10%.

- Tariff hike & retail growth back to pre-covid level likely triggers: RIL continues underperforming (since mid-Sep'20) the market and peers across businesses. Petrochemical margins are already down from peak and large capacity additions in products that account for 70% of RIL's volumes may mean further correction. Diesel cracks' rise to pre-covid levels is key to GRM recovery but, with only 3.6m b/d refinery closures announced vs 6m b/d needed, recovery is likely to be slow. Q1 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 retail growth to pre-covid levels in FY23E may see the stock performance improving.

Shares of RELIANCE INDUSTRIES LTD. was last trading in BSE at Rs. 2054.3 as compared to the previous close of Rs. 2077.7. The total number of shares traded during the day was 271432 in over 28303 trades.

The stock hit an intraday high of Rs. 2083.5 and intraday low of 2041.2. The net turnover during the day was Rs. 559506080.

Source : Equity Bulls

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