Reliance Industries rating – Overweight: A sombre final quarter in the offing

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RIL should report a sombre quarter with 5% Ebitda and 4% earnings growth q-o-q as tighter energy markets that largely started in mid Feb flow through into earnings with full impact in current quarter. Telecom could continue to see pressure from declining subscribers, though most of last year’s tariff hikes will filter into profits starting Q4FY22. Retail should see steady growth with rising store count despite some inflationary pressure. Overall Ebitda for each division should rise q-o-q, while higher net finance cost due to depreciation of the rupee and RIL’s refinancing debt will likely lead to slower profitability growth.

What to look for in FY23? Consensus FY23/24 forecasts are up 2-3% YTD, but we still see potential for ~10%+ EPS raise on stronger conviction in energy markets. The inflection in refinery margins (nearly doubled), significant normalisation in chemical portfolio profitability towards above mid cycle levels, doubling of gas ASPs are all clearly multi-year shifts which are not yet factored in base case estimates. Also these shifts more than offset the challenges in digital business and any cost inflation in consumer retail.

What are we watching for in Q4FY22? Mgmt commentary on benefits from higher fuel margins and crude sourcing strategy, comments on petrochemical demand in domestic market and impact of higher prices on domestic demand, signs of reversal in telecom subscriber churn and impact of downtrading by consumers due to tariff hikes. In retail – digital revenue growth, new store growth & mgmt’s comments around managing costs.

All about energy: Q4FY22 and most of 2022 we believe will shift the spotlight back on the energy vertical with investor perception reversing as refining, chemicals and upstream gas lead the way for earnings and NAV upgrades. Q4FY22 was a quarter of two halves as the first half saw significant margin pressure in chemicals with oil price spike and stable refinery margins. From mid Feb-22, tightness in the energy markets drove refinery margins to double by end March and chemical prices caught up with higher oil prices, leading to above mid-cycle margins. Hence we estimate a sombre 5% q-o-q rise in oil to chemicals Ebitda, but significant inflection is in works now. We assume $10.5/bbl GRM (up q-o-q) but 10% q-o-q decline in chemicals Ebitda/ton in Q4FY22.

Telecom: We expect the churn in subscribers to have continued in Q4FY22 with 4-mn net reduction in subscribers driving nearly 150-mn churn over the past six quarters. Consolidated ARPUs (wireless + broadband) are expected to reflect nearly 70% of the tariff hikes announced in Nov-21 and rise 7.2% q-o-q. We still expect another 5% rise in ARPUs in Q1FY23 and fully reflect the tariff hike. Overall telecom Ebitda for the digital business should rise by 5% q-o-q and 21% y-o-y with some of the ARPU increases negated by higher network costs with the rise in diesel prices in Mar-22. We expect digital Ebitda to remain stable q-o-q.

Retail: Strong and Steady – We expect a 15% q-o-q increase in revenue with similar Ebitda increase due to new store additions & slight increase in SSG. There’s improved traction on Jiomart considering 14% q-o-q rise in downloads. Data from RIL Retail’s competitors like DMART do point to slow SSG increase after the Q3FY22 festive quarter.