Reliance Industries Slips After Mixed Q1FY22 Report Card; What’s Next?

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Reliance Industries Ltd (NS: RELI ), India’s largest private sector company, and oil to telecom and retail giant slips after subdued report card for Q1FY22. RIL was already under stress on the resurgence of COVID in major economies in late 2020 as it’s a major exporter of gasoline. RIL stumbled from its lifetime high around 2369 in Sep’20 to a low around 1830 in Jan’21. RIL then recovered steadily to a high of 2275 in June’21 amid rapid progress of COVID vaccinations on both sides of the Atlantic (U.S.-Europe), reopening of the economy/society (paving higher demand for transportation and other fuel) coupled with high expectations for the RIL AGM.

But RIL again slid after its 44th AGM. The primary reason was the green (RE) CAPEX (initial) announced for Rs.75B for the next three years (FY: 23-25), which may cause more negative FCF (Free Cash Flow) for the company and lower ROCE (return of capital employed). The market was expecting a much lower initial green CAPEX from RIL due to poor visibility of the green economy by the next few years for a country like India. RIL may also take fresh debt after initial Capex as per evolving situation/progress of the RE business.

Also, RIL’s emphasis on 5G CAPEX despite its uncertain outlook in India may be another factor that disappointed the market. Overall, the long gestation period nature of RE and telecom (5G) business and depressed FCF may keep RIL’s gross debt at elevated and ROCE at muted levels in the coming years amid falling EBITDA margin for its cash-cow patrochem business. For RIL/MDA, data was like new oil (unlimited); petchem profit was the main support for cash-burning telecom and retail business. But when petchem cash flow slows, it bounds to affect other startup ventures (RE, digital, and retail).

In the last 15-years, RIL generated consistently negative FCFC due to its huge CAPEX for its refinery/oil and telecom business. RIL was virtually a debt-free company (on a net basis) till a few years ago, but over the last few years, it has had to take huge debt to support its telecom (Jio) dream and oil CAPEX (to support efficacy/refining margin and expansion/diversification).

Highlights of Q1FY22 earnings: RIL (Consolidated)

  • Operating revenue was around Rs.1.44T against Rs.1.55T sequentially (-6.79%) and Rs.1.21T yearly (+63.59%); average revenue for the last 4-qtrs was around Rs.1.2T
  • Operating expenses was around Rs.1.21T against Rs.1.32T sequentially (-8.01%) and Rs.0.71T yearly (+69.53%)
  • EBITDA was around Rs.23.37B against Rs.23.35B sequentially (+0.07%) and Rs.16.88B yearly (+38.48%)
  • Net interest paid around Rs.3.40B against Rs.4.04B (-16%) sequentially and Rs.6.74B yearly (-49.56%)
  • Lower interest payment resulted in higher EBTDA (core operating profit: EBITDA-INTT) around Rs.19.97B against Rs.19.31B sequentially (+3.44%) and Rs.10.14B (+96.95%)
  • In Q1FY21 revenue/business was severely affected by both local and global lockdown (COVID) and thus there was a favorable base effect for Q1FY22
  • But in Q1FY22, revenue was also impacted by India’s 2nd COVID wave (tsunami), although to a much lesser extent because of less severe lockdown; RIL’s consumer-facing retail business was severely affected in Q1FY22 too for COVID lockdowns and store closures
  • In Q2FY22, RIL’s EBTDA/Share; i.e. core operating EPS was around Rs.30.49 against 29.96 sequentially (+1.78%) and Rs.15.73 YEARLY (+93.80%); average EBTDA/Share for the last 4-qtrs was around Rs.23.10
  • EBITDA margin was around 16.19% against 15.08% sequentially and 19.12% yearly; the average for the last 4-qtrs was 16.97%
  • Interest/EBITDA was around 14.54% against 17.32% sequentially and 39.91% yearly
  • Overall, EBITDA margin was stable and Interest/EBITDA fell drastically as RIL accelerated its JIO deleveraging effort after COVID, as digital business is the part & parcel of ‘K’-shaped economic recovery; COVID adversity is a great opportunity for RIL’s digital business and MDA capitalized well
  • Exports from RIL India at Rs.56.16B vs 32.68B yearly (+71.8%) due to higher price realizations despite lower volumes

Highlights of Q1FY22 earnings: R-Jio (Consolidated)

  • In Q1FY22, core operating revenue for R-Jio was around Rs.18.96B against Rs.18.28B (+3.67%) and Rs.17.25B yearly (+9.8%)
  • Jio EBITDA was around Rs.8.89B against Rs.8.57B sequentially (+3.73%) and Rs.7.33B (+21.3%)
  • Jio EBITDA margin was around 46.9% in Q2FY22, unchanged sequentially, but improved modestly from 42.5% in Q1FY21 amid better operational efficiency
  • Jio added 26.7M  and42.3M (NYSE: MMM ), new customers, since Q4FY21 and Q1FY21 respectively; as of 30th June’21, the total customers was 440.6M, substantially more than the total U.S. population
  • Jio ARPU in Q1FY22 was around Rs.138.4, almost flat sequentially, but lower slightly every year
  • Recently acquired spectrum from Bharti Airtel (NS: BRTI ) is being deployed rapidly to enhance network capacity amid an increasing customer base
  • JioFiber (BB) segment is also improving gradually with more than 3M connected homes despite COVID challenges on the ground physical work

Highlights of Q1FY22 earnings: R-Retail (Consolidated)

  • Core operating revenue was around Rs.33.57B against Rs.41.30B sequentially (-18.72%) and Rs.28.20B yearly (+19.0%)
  • EBITDA was around Rs.1.94B against Rs.3.62B sequentially (-46.41%) and Rs.1.08B yearly (79.9%); without investment income of Rs.0.55B in Q2FY21, the effective EBITDA was around Rs.1.39B
  • EBITDA margin was at 5.8% against 8.8% sequentially and 3.8% yearly
  • Domestic petro retailing business grew by +32% on a y/y (yearly) basis
  • Retail business was helped by grocery (COVID lockdown), consumer electronics, and fashion & lifestyle (both online and offline)
  • Opened 123 new stores in Q1FY22; total stores were around 12803; may open another 700+ stores in FY22 as COVID restrictions are being lifted
  • Digital commerce and merchant partnerships contributed almost 20% of total sales and helped alleviate partially the loss of business due to store closures
  • Retail operations were moderately affected due to full/partial COVID lockdowns, various restrictions across India in Q1FY22
  • Consumer sentiment was also severely affected due to the COVID tsunami in the country
  • Good prospect for JioMart (grocery and essential items)amid COVID disruptions and increasing tie-up with ‘Kirana’ (small neighborhood grocery shops)
  • Growing pharma business (Netmeds); emphasize on apparel & lifestyle business too

Highlights of Q1FY22 earnings: O2C (Oil to Chemicals) business-Consolidated

  • Revenue around Rs.1.03T against 1.01T sequentially (+1.94%) and Rs.0.59T yearly (+75.2%)
  • EBITDA around Rs.Rs.12.23B against Rs.11.40B sequentially (+7.28%) and Rs.8.17B (+49.8%)
  • EBITDA margin 11.9% vs 11.3% (q/q); and 13.9% (y/y)
  • Revenue soared on a y/y basis due to higher prices of crude oil , while EBITDA improved on a rebound in transportation fuel cracks to 4-6 quarters high
  • Higher export of petro products compensated domestic revenue loss amid COVID tsunami
  • Upbeat global oil demand despite COVID disruptions
  • Tight oil supplies due to strong OPEC+ production cut compliances
  • Transportation fuel cracks gained momentum on stronger demand amid rapid COVID vaccinations and increasing reopening of the economy in AEs (U.S.-Europe), but mobility is still 12% below pre-COVID levels due to ongoing restrictions in several Emerging Markets and constrained international aviation traffic

Highlights of Q1FY22 earnings: RIL (standalone)

  • Core operating Revenue around Rs.90.57B vs 85.98B sequentially (+5.34%) and Rs.47.46B yearly (+90.83%)
  • Core operating profit (EBTDA=EBITDA-INTT) around Rs.9.11B vs 7.17B sequentially (+27.01%) and 4.78B yearly (+287.95%)

Statement by Mukesh Ambani, the Chairman and Managing Director (RIL):

“I am happy that our Company has delivered robust growth despite facing a highly challenging operating environment caused by the second wave of the COVID pandemic. The results of the First Quarter of FY2022 clearly demonstrate the resilience of Reliance’s diversified portfolio of businesses that cater to large parts of the consumption basket.

In our O2C business, we generated strong earnings through our integrated portfolio and superior product placement capabilities. Along with our partner BP (LON: BP ), we commissioned the satellite cluster in KG D6 and continued to ramp up production, contributing to 20% of gas production in India. This will be a major contribution to our country’s energy security.

Jio has posted yet another record quarterly performance with industry-leading operating metrics. I am thankful to Jio’s family of loyal subscribers, whose number has grown further during the quarter, consolidating its position as India’s No. 1 provider of digital connectivity and services. They appreciate our continuing focus on raising the bar for superior service quality.

COVID-related restrictions on store operations during the quarter impacted our Retail business operations and profitability. This is a temporary phenomenon. We remained focused on ensuring supplies of necessities, including food, grocery, health & hygiene products through a combination of online-offline channels. We stepped up our efforts in creating partnerships with small merchants and digital engagement with consumers. This is creating a newer and inclusive model of growth. I am confident that the retail business is poised to create exponential value and growth.

I am most excited by the swift start to our new Clean and Green Energy business initiative. We have started investment across all verticals to execute our ambitious plans. We are also resolutely implementing our vision of net carbon zero before 2035, which is our highest priority. We remain committed to disciplined capital allocation with an emphasis on long-term value creation for our shareholders.”

Overall Q1FY22 report card of RIL was mixed due to COVID disruptions. The market was more concerned about lack of clarity on deleveraging (R-Jio/Retail, stake sale to Saudi Aramco (SE: 2222 )) and new green energy venture CAPEX. RIL’s consumer-facing business like retail suffered a lot amid COVID 2nd wave.

Looking ahead, the market is expecting around $10B proceeds from Saudi Aramco in RIL’s stake sale, which could be used for RIL’s new green energy ventures. Apart from R-Jio’s regular business (mobile data), the next growth may come from the increasing focus of broadband with the offering of high-speed unlimited data plan, the future of digital India even after COVID.

Going forward, deleveraging savvy Ambani may go for IPO for R-Jio as well as Retail. Ambani may also go for organic/inorganic expansion of Reliance Retail. Apart from deleveraging issues, the market may be also concerned about RIL as any Greenfield RE business has a significantly long gestation period, and thus consolidated FCF may be negative for the foreseeable future.

RIL’s digital and even retail business (essential/grocery items) is also a part of the K-Shaped economic boom after COVID. RIL is now gradually transformed itself from fossil fuel (oil) heavy business to green fuel (RE) along with digital and retail (consumer business). Visionary Ambani knows that the days of oil (fossil fuel) supremacy are over and the world will now gradually shift to green energy. The transition is rapidly happening in AEs (U.S./Europe) including China, and India is bound to follow.

Fair Valuation of RIL: Rs. 2444.00 by Mar’22

In FY21, RIL reported core operating EPS 92.39 amid COVID disruptions and below the average of FY: 19-20 around 109. Looking ahead, as an export savvy with increasing domestically focused company, RIL may report 15% CAGR in its core operating EPS amid faster reopening of the economy in AEs as well as in India. In that scenario, assuming a decent average PE of 20 (in line with previous trends), the FY: 22-25 valuations may be around 2125-2444-2810-3231. As the market is now discounting FY23 earnings, RIL may scale 2444 levels by Mar’22 and subsequently 2810 by Mar’23 and 3232 by Mar’24. For RIL, an average core operating PE of 20 may be reasonable due to elevated CAPEX and negative/muted FCF issues.

Technical View: RIL

Technically, whatever may be the narrative, RIL now has to sustain over 2035 for 2275-2385-2445; otherwise sustaining below 2015-1995, may fall to 1960-1900-1875 zones, which may be a good buying area for investment purposes is an excellent business that is under temporary COVID disruption.

Financial analysis of RIL: Consolidated
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  • Ashish Sardana @Ashish Sardana
    2160 this month, 1900 next month, 2600 till March
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