Reliance Industries - Company Update - Firing on all cylinders! - BUY

Mr. Avishek Datta, Research Analyst at Prabhudas Lilladher

Quick Pointers:

- Strong GRMs, high gas price to drive RIL's hydrocarbon earnings
- Tariff hikes along with higher operating rates for stores post pandemic to drive telecom and retail profits.

We increase our FY23-24E assumptions by 4-8% as we factor in higher GRMs (+USD1.5/bbl) and gas prices (+USD3-3.2/mmbtu), partially offset by higher cost inflation and depreciation charges. Low product inventory and strong demand has pushed oil product spreads, which will benefit complex refiners like RIL. Gas to oil switch is also supporting higher diesel spreads. Additionally, domestic gas prices are set for sharp upmove on backdrop of multi-fold increase in international prices. Resultantly, we increase our estimate of gas realisation by 59% to USD10/mmbtu. Also incremental volumes of 12mmscmd from RIL's MJ field by Q3FY23E are timely because of tight market conditions. Meanwhile, we expect RIL's telecom and retail segment performance to remain strong on back of flow through of tariff hikes and opening of stores. RIL remains one of our preferred pick with play on strength across its business verticals. Reiterate BUY with revised PT of Rs3,045 (Rs2,955 earlier).

Low product inventory, strong demand to drive GRMs: GRMs have been strong due to low inventory levels along with disruptions in product supplies, due to ongoing geopolitical tensions. Low inventory in US and EU will likely keep diesel spreads elevated (Q4 avg at USD17/bbl vs Q3 USD12/bbl). Along with resilient gasoline spreads of USD16/bbl, we expect RIL to benefit from elevated spreads. We increase our GRM assumptions for FY23/24E by 17% to USD10.5/bbl.

Tight global markets to drive gas realisations higher: Spot LNG prices have been on an upswing and averaged USD35/mmbtu in Q3FY22 (+90% QoQ), led by higher demand from EU. Amidst geopolitical tensions, gas prices are likely to remain at elevated levels. Recently, RIL has placed 0.65mmscmd CBM gas at USD22/mmbtu (13.2% of Brent + USD8.28/mmbtu premium) given the tight market conditions as there is no cap on pricing. Accordingly, we expect RIL's KG gas prices to see sharp revision by ~59% to USD10/mmbtu for FY23/24E over H2FY22 average of USD6.13/mmbtu.

Also, RIL's KG D6 MJ filed volumes will start from Q3FY23 which will increase gas volumes by 67%/12mmscmd to 30mmscmd.

Telecom - Sim consolidation, tariff hikes to drive earnings: Jio's subscriber count dropped by 4.5% over last six months to 421mn at the end of Q3FY22 due to SIM consolidation given churn at lower ARPU plans post tariff hikes. However, active subscriber count growth remains impressive at 9mn for Q3FY22 with VLR share rising to 87.6% vs 82.4% in Q3FY20. We expect recent price hike to flow through in coming quarters.

Shares of Reliance Industries Limited was last trading in BSE at Rs. 2539.70 as compared to the previous close of Rs. 2531.10. The total number of shares traded during the day was 200221 in over 17464 trades.

The stock hit an intraday high of Rs. 2565.00 and intraday low of 2526.20. The net turnover during the day was Rs. 510400664.00.

Source : Equity Bulls

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