Reliance Industries - Concerns overdone; strong quarter expected - HDFC Securities

Harshad Katkar, Institutional Research Analyst, HDFC Securities and Jay Gandhi, Institutional Research Analyst, HDFC Securities.

Month-to-date, Reliance Industries' (RIL) stock has underperformed the Sensex by ~9% because of levy of Special Additional Export duty (SAED) on exports of petrol, diesel and ATF. We believe the recent correction is overdone and, hence, reiterate our ADD rating on RIL with a target price of INR 2,825/sh, premised on (1) recovery in the O2C businesses; (2) improvement in ARPU, subscriber addition, and new revenue streams; and (3) further value unlocking in the digital and retail businesses.

Strong quarter expected: We expect RIL to report EBITDA of INR 401bn, (+71% YoY; +28% QoQ), driven by (1) all-time high refining margins, (2) higher oil and gas price realisations, (3) sequential improvement in ARPU for JIO and (4) continued growth in retail business. Consolidated APAT is estimated at INR 229bn (+87% YoY, +41% QoQ). Petchem segment is likely to remain a drag.

Oil to chemicals (O2C) segment: In Q1, we estimate O2C EBITDA to grow by +88% YoY to INR 224bn, primarily due to higher transportation fuel cracks and higher crude throughput estimates of 19.4mmt (+2.1% YoY, +0.5% QoQ). In Q1FY23, gasoline spreads improved sharply to USD 28.4/bbl (+3.9x YoY, +2.2x QoQ), gasoil spreads to USD 39.8/bbl (+6.9x YoY, +2.7x QoQ), and jet kero spreads to USD 34.8/bbl (+6.5x YoY, +2.8x QoQ).

Export tax hurting refiners' net realisation: Over the last 15 days, gasoline cracks declined from the recent peak to USD 10.7/bbl (down by USD33.2/bbl), gasoil cracks declined to USD 35.1/bbl (down by 24/bbl) and ATF declined to USD 29.7/bbl (down by 25.6/bbl), implying negative spreads currently on export of gasoline (net of USD 12/bbl export tax) and significantly reduced realisations on export of diesel and jet kero for Indian refiners. While the imposition of export levy remains a material short-term negative for the exporting refineries, we remain optimistic on government reducing/withdrawing the duty during its fortnightly reviews with (1) improvement in the availability of fuel in domestic market and (2) reduction in auto-fuel marketing losses as international prices decline. We expect strong transportation fuel crack spreads to sustain over FY23 and FY24. Even after factoring in the worst case impact for RIL, strong product cracks and use of Russian crude should support our estimates of USD 12/13 per bbl GRMs over FY23/24E.

Oil & gas: We expect oil & gas segment EBITDA to grow by +3.7x YoY to INR 24bn, driven by sharp improvement in price realisaton and stable production from the KG D6 block.

RJPL: Revenue should improve to INR 228bn (+27% YoY, +9% QoQ), driven by an increase in ARPU to INR 171 (+24% YoY, +2% QoQ). However, we expect the subscriber base at 405mn, a decline of 5mn subscribers QoQ, given the continuation of SIM consolidation.

Reliance Retail: We expect Reliance Retail's (RR) net revenue to grow 59% YoY to INR 535bn and EBITDA to grow to INR 37bn (+89% YoY), with EBITDA margin at 6.8% (+106bps YoY, -45bps QoQ).

Valuation: We use EV/EBITDA to value downstream at Mar-24E EV/e, retail on peer benchmarked EV/e and E&P and Jio on DCF. The stock is currently trading at 10x Mar-24E EV/EBITDA and 17.6x Mar-24E EPS. Maintain ADD.

Shares of Reliance Industries Limited was last trading in BSE at Rs. 2396.95 as compared to the previous close of Rs. 2377.30. The total number of shares traded during the day was 249673 in over 17689 trades.

The stock hit an intraday high of Rs. 2434.50 and intraday low of 2377.50. The net turnover during the day was Rs. 598895876.00.

Source : Equity Bulls

Keywords

RelianceIndustries INE002A01018 RIL HDFCSecurities