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Equity Research Report: Reliance Industries Ltd.

RIL is a big beneficiary of Russia-Ukraine geopolitical tensions and economic sanctions on Russian oil, especially in the EU

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Company Overview, Business Model & Competitors:

Reliance Industries Ltd (RIL) is an Indian MNC conglomerate and the largest private sector company in India. RIL has diverse businesses from data to oil including energy, petrochemicals, natural gas, EV/RE (solar & hydrogen), retail, digital services, telecommunications, electronic media/TV channels, and textiles. Reliance is one of the most profitable companies and also the largest publicly traded company by market capitalization, revenue, tax payment, and employment generation in India. RIL is also India's largest merchandise exporter, having around 7% share with access to foreign markets in over 100 countries. RIL alone contributes almost 5% of GOI’s total revenue from customs & excise duties. RIL is also the highest income/corporate taxpayer for the private sector in India.

RIL is a diversified corporate organized mainly 6 areas of activity: Refining of petroleum and various downstream products (O2C- Oil to Chemical-almost 65% of total revenue is the bread & butter/cash cow) - liquefied petroleum gas, propylene, naphtha, gasoline, kerosene, etc. RIL also produces petrochemicals (polyethylene, polypropylene, polyvinyl chloride, polyester, purified terephthalic acid, paraxylene, ethylene, olefins, benzene, butadiene, acrylonitrile, and caustic soda).

The O2C business of RIL captures a broad portfolio spanning transportation fuels, polymers, polyesters, and elastomers. The deep and unique integration of the O2C business includes world-class assets comprising ROGC, Aromatics, Gasification, multi-feed, and gas crackers along with downstream manufacturing facilities, logistics, and supply chain infrastructure.

Specifically, Reliance O2C entity includes refining and petrochemicals plants and manufacturing assets located at Jamnagar, Hazira, Dahej, Nagothane, Vadodara, Patalganga, Silvassa, Barabanki, and Hoshiarpur. It also includes a 51% equity interest in fuel retailing JV with BP – Reliance BP Mobility Limited (RBML) and 74.9% in Reliance Sibur Elastomers Private Limited. RIL is one of the largest integrated polyester players globally having 10 manufacturing facilities in India and 3 in Malaysia.

RIL also involves in the retail & distribution business (B2C and B2B) of consumer products (almost 25% of total revenue): distribution of food products, clothing, and accessories, consumer electronics, etc. through a vast network of brick & mortar stores in India.

RIL is also engaged in telecommunication/digital services (R-Jio-almost 10% of total revenue); exploration and production (E&P) of crude oil and natural gas (around 2% of total revenue); media business (around 1% of total revenue) and others (financial services; textile manufacturing, etc.). Almost 60% of revenue comes from India, while 40% is generated from exports, mainly petroleum/diesel/gasoline, and refined products, especially to diesel-starved Europe since last year (after Europe banned Russian refined products amid the Ukraine war).

RIL has the world’s biggest oil refining complex at Jamnagar (1.24 mbpd) and can export almost 80% of the output after the Russia-Ukraine war broke out back in late Feb’22. Before that, RIL was able to utilize only around 75% of its capacity. RIL has also better refining efficiency and generally processes high Sulphur density crude oil from Russia, Saudi Arabia, and other cheaper sources and sells it at a higher grade, resulting in a higher margin (GRM).

RIL has significant flexibility in terms of crude feedstock ratio and yield shifts. Surging diesel prices in Europe after it bans Russian oil and various big Asian/Chinese refineries including RIL are big beneficiaries as they bought cheap Russian crude oil ($25-30 discount from global market prices) and sold the same after refining to Europe at higher prices.

Overall, oil, metals/steel is a big beneficiaries of Russia-Ukraine geopolitical tensions and subsequent economic sanctions on Russia, a key producer of commodities. Anyway, to control domestic prices/inflation, the Indian government slapped a windfall tax (export duty) on Indian oil refiners and steel producers. Subsequently, an export levy of Rs.13/liter on diesel and Rs.6/liter on ATF was imposed on 1^st July’22. The Modi admin also imposed windfall taxes on domestic producers of crude oil (like ONGC) as it was also benefiting from abnormally high global prices. As a result, RIL scrip tumbled from a record high of around 2861 in early July to 2896 in late September’22.

Before COVID, RIL’s GRM was around $8-10. In Q4FY22 (March 22), RIL’s GRM surged to $15.1 from $5.1 a year ago. Before the Russia-Ukraine war, RIL’s export-savvy O2C business suffered significantly in FY21 due to COVID lockdown/restrictions in Europe. But the overall impact of a windfall tax on RIL was limited because of the exemption of its Jamnagar refineries to some extent for EOU status (Export Oriented Unit).

Also, the Indian government withdrew the export tax on Petrol and reduced the same for diesel and ATF export in mid-July’22 in line with falling prices of crude oil globally. But overall, the spread for refined petro products also slumped by almost 50%. After revision in mid-Feb’23, the export duty of diesel was 2.50/lt in line with the fall in global oil prices amid the concern of synchronized global recession, especially on both sides of the Atlantic (U.S.-Europe on growing banking crisis). Like steel, falling oil prices are also negative for overall spreads/realizations/GRM of oil refineries like RIL and vice-versa.

In India, RIL’s export-oriented O2C business’ main competitor is Russian Rosneft-backed Nayara Energy (unlisted and small compared to RIL). Also, other competitors are IOL, VEDL, MRPL, and ONGC to some extent (limited completion in O2C business). In consumer-facing business, RIL has various big retail brands and competitors in textiles/dress materials, store & service concepts (including FMCG, food/agri, and pharma products), and also various digital services. In telecom, R-JIO now has only one viable competitor (Bharti Airtel). In EV/RE business, RIL also has limited competitors (Adani and a few others).

Key management: Mukesh Ambani (Chairman & MD); Srikanth Venkatachari and Alok Agarwal (Jt. CFO)

Board Members:

Key Shareholders: Ambani Family (promoter)

 

 

Summary of latest report card: Q4FY23 (Consolidated: INR 100 Cr. =1B)

·         Operating revenue Rs.2163.76B vs 2205.92B sequentially (-1.91%) and 2118.87B yearly (+2.12%)

·         The annual revenue growth was supported by upbeat momentum in consumer business led by digital services (+15.4%); retail (+19.4%) and oil & gas (+50%) due to higher price realizations/spreads

·         But annual revenue was also dragged from O2C (oil to chemical) business amid sharp increases in crude oil prices and lower price realization on downstream projects (lower realizations/spreads)

·         Operating expense Rs.1779.36B vs 1853.45B sequentially (-4.00%) and 1805.21 yearly (-1.43%)

·         EBITDA Rs.384.40B vs 352.47B sequentially (+9.06%) and 313.66B yearly (+22.55%)

·         Higher EBITDA due to strong growth and higher margins in digital business, favorable mix, sourcing benefits, and operating efficiencies in the retail segment; higher transportation fuel cracks and optimized feedstock cost

·         But EBITDA was also partially offset by lower downstream chemical margins in the O2C segment coupled with better gas price realization and higher volumes in the oil & gas segment

·         Net interest paid Rs.58.19B vs 52.01B sequentially (+11.88%) and 35.56B yearly (+63.64%)

·         Higher interest due to higher borrowing costs (rising bank rates and bond yields) and higher debt (loan balances)

·         Gross debt Rs.3147.08B vs 3035.30B sequentially and 2663.05B yearly

·         Higher debt primarily to fund 5G/telecom/digital, EV, and retail expansion CAPEX

·         Core operating profit (EBTDA=EBITDA-INTT) Rs.326.61B vs 300.46B sequentially (+8.57%) and 278.10B (+17.30%)

·         Core operating EPS (EBTDA/Share) Rs.48.21 vs 44.41 sequentially (+8.57%) and 41.11 yearly (+17.28%)

·         EBITDA margin 17.77% vs 15.98% sequentially (+179 bps) and 14.80% yearly (+296 bps)

·         EBTDA margin 15.08% vs 13.62% sequentially (+146 bps) and 13.12% yearly (+195 bps)

·         Interest/EBITDA 15.14% vs 14.76% sequentially (+38 bps) and 11.34% yearly (+380 bps)

·         Lower tax payments due to lower deferred tax and export duty obligation on refined diesel/petrol

Summary of latest report card: FY23 (Consolidated: INR 100 Cr. =1B)

·         Operating revenue Rs.8929.44B vs 7216.34B (+23.74%)

·         Operating expense Rs.7500.36B vs 6111.74B (+22.72%)

·         EBITDA Rs.1429.08B vs 1104.60 (+29.38%)

·         Net interest paid Rs.195.71B vs 145.84B (+34.20%)

·         Core operating profit (EBTDA=EBITDA-INTT) Rs.1233.37B vs 958.76 (+28.64%)

·         Core operating EPS (EBTDA/Share) Rs.182.29 vs 141.72 (+28.62%)

·         EBTDA margin 13.81% vs 13.29% (+53 bps)

·         EBITDA margin 16.00% vs 15.31% (+70 bps)

·         Interest/EBITDA ratio 13.69% vs 13.20% (+49 bps)

·         Growth in revenue supported by continuing growth momentum across all businesses led by consumer business (Digital Services, retail) and O2C (amid higher realizations on the back of a 19% increase in average Brent crude price)

·         Oil and Gas business Revenues increased due to a sharp increase in gas price realization and a 10.7% increase in KG D6 gas production

·         Increase in revenue along with steady improvement in margins leading to higher EBITDA growth in Digital Services Segment

·         Margin expansion with benefits of scale and operating leverage resulting in robust growth in the Retail segment

·         The sharp improvement in fuel cracks was partially offset by the introduction of SAED on the export of transportation fuels and lower downstream product delta in the O2C segment. This resulted in EBITDA growth of 17.7%

·         Higher gas price realization in the Oil & Gas segment leads to higher EBITDA growth (mainly lower base effect)

·         Finance costs (interest) increased due to higher interest rates and loan balances along with foreign exchange (FX) fluctuations (cross currency headwinds)

Summary of latest report card: Q4FY23 (Standalone: INR 100 Cr. =1B)-Mostly energy business

·         Operating revenue Rs.1221.33B vs 1294.15B sequentially (-5.63%) and 1339.91B yearly (-8.85%)

·         Operating expense Rs.1040.63B vs 1143.81B sequentially (-9.02%) and 1194.10 yearly (-12.85%)

·         Core operating EPS (EBTDA/Share) Rs.21.17 vs 17.27 sequentially (+22.59%) and 18.62 yearly (+13.70%)

·         EBITDA margin 14.80% vs 11.62% sequentially (+318 bps) and 10.88% yearly (+391 bps)

·         EBTDA margin 11.73% vs 9.03% sequentially (+ 270 bps) and 9.40% yearly (+233 bps)

·         Interest/EBITDA 20.72% vs 22.28% sequentially (-155 bps) and 13.61% yearly (+712 bps)

 

Summary of latest report card: FY23 (Standalone: INR 100 Cr. =1B)-Mostly energy business

·         Operating revenue Rs 5432.49B vs 4453.75B (+21.98%)

·         Operating expense Rs.4761.50B vs 3930.62B (+21.14%)

·         Core operating EPS (EBTDA/Share) Rs. 80.51 vs 63.84 (+26.11%)

·         EBTDA margin 10.03% vs 9.70% (+33 bps)

·         EBITDA margin 12.35% vs 11.75% (+61 bps)

·         Interest/EBITDA ratio 18.82% vs 17.44% (+138 bps)

Remarks by Mukesh Ambani (Chairman & MD) on the RIL report card:

“I am happy to note Reliance’s initiatives in digital connectivity and organized retail are driving greater efficiencies in the economy and contributing to India’s emergence as one of the fastest growing economies in the world. Jio continues to digitally empower millions of citizens across the nation, extending ‘True’ 5G reach to 2,300+ cities and towns in a short span of 6 months. With steady growth in mobility and FTTH subscriber base and an expanding bouquet of content and digital services, the Jio business continues to deliver impressive growth in operating profits.

Retail businesses registered excellent growth numbers backed by the expansion of physical and digital footprints and a significant increase in footfall. We continue to expand our product base across consumption baskets, ensuring our customers get world-class products at affordable prices. Our retail team has an unwavering focus on enhancing consumer experience and ease of shopping.

The O2C segment posted its highest-ever operating profit despite global uncertainties and disruptions in commodity trade flows. Our oil and gas segment also delivered very strong growth and is now poised to contribute nearly 30% of India’s domestic gas production.

This year we have proposed to demerge our financial services arm and list the new entity “Jio Financial Services Ltd.”. This allows our shareholders to participate in an exciting new growth platform from inception.

Implementation of our New Energy Giga factories at Jamnagar is making significant progress. This puts us on track to achieve our goals of transitioning to cleaner energy and enabling sustainable growth. I believe Reliance’s significant investments and strategic partnerships in the renewable energy vertical will help transform the energy landscape of India and the world, in the coming years.”

Highlights of management comments (presser and Q&A):

Reliance JIO Infocomm:

·         Healthy growth in Revenue from operations was led by the full impact of the tariff hike, ramp-up of wireline services, and continued subscriber addition for mobility services

·         Strong EBITDA growth is on account of higher revenue and steady improvement in margins

·         Finance Cost is stable due to the prepayment of high-cost deferred payment liabilities in FY22, partially offset by a rise in interest rates

·         ARPU (178.80 vs 178.20 sequentially vs 167.60 yearly) increased 6.7% Y-o-Y due to the impact of the tariff hike, better subscriber mix, and data add-ons within select customer cohorts

·         Healthy subscriber additions and improvement in ARPU drive revenue and EBITDA growth for the connectivity business

·         In addition, the scale-up of technology and digital services platform drives JPL's consolidated revenue growth

·         Stress on targeted unlimited data plan for unlimited entertainment

·         Focus on continuous expansion and diversification (within the digital segment) both organically and inorganically

·         Jio Has Established 5G Coverage Leadership

·         Fastest 5G rollout of this scale globally

·         5G To Drive Next Leg Of Growth

·         Jio 2.0 opportunity to transform digital infrastructure in India

·         5G and fixed broadband (FTTH) are key focus areas for FY24

·         Per capita, monthly data usage has increased to 23.1 GB vs 13.3 GB two years ago

·         Total customer base 439.30M vs 432.90M sequentially vs 410.20 yearly

Comments by Akash Ambani (CEO):

“Jio has taken formidable strides in pioneering 5G rollout across the country with the unmatched speed of execution. 5G has led to a significant improvement in customer experience, reflected in the higher engagement levels among Jio users. Jio remains committed to building a robust digital society with tailor-made technology platforms which will drive sustained growth in earning and value for all stakeholders.”

Reliance Retail:

·         Solid revenue growth and EBITDA amid broad-based growth across consumption baskets and favorable mix, sourcing benefits, and operating benefits

·         Higher Finance cost on account of an increase in borrowings for business expansion

·         With a focus on store network expansion, the business grew its store footprint across consumption, the business grew its store footprint across consumption baskets

·         Investments in boosting supply chain infrastructure remained a priority to deepen warehousing and fulfillment capabilities

·         The business continued to innovate, launch and scale up new retail formats to serve diverse customer segments. The year witnessed several such new format launches including Smart Bazaar, Azorte, Centro, Fashion Factory, and Portico

·         Leveraging Omni channel capabilities, digital commerce platforms led by JioMart and AJIO sustained growth momentum and continued to serve customers far and wide

·         New Commerce business continued to grow rapidly with the expansion of its merchant partner network across geographies

·         The business added new growth initiatives to its portfolio by foraying into FMCG and Beauty businesses

·         The FMCG business launched several products during the year including ‘Independence’ brand and the iconic beverage brand, ‘Campa’

·         The beauty business launched the digital commerce platform ‘Tira’ and opened its flagship store in Mumbai. These businesses would be ramped up progressively in the coming period

·         The Consumer Electronics business grew on the back of festive events, promotions, and new launches

·         The fashion & Lifestyle segment performing well amid affordable brands like Trends, AJIO (high-quality value for money), and also various premium brands

·         The Jewelry business saw robust revenue growth on the back of the wedding season and regional festivities

·         The Jewellery business continued to focus on strengthening product offerings with new collection launches

·         Urban Ladder continued its store expansion to bolster the Omni-channel experience and wider product offering with a catalog

·         In Grocery, Reliance Retail’s stores led by Smart and Smart Bazaar formats witnessed strong growth arising from store expansion and volume growth in existing stores

·         The business delivered robust revenue growth led by growth across categories

·         The non-food contribution continues to expand and is further completing the daily and monthly shopping needs of the customers

·         The business has been working with many small and medium-scale entrepreneurs in branded food segment and helping them to grow their presence pan India and filling up gaps to serve market opportunities

·         Grocery New Commerce remained focused on expanding market coverage to boost penetration and strengthen its supply chain capabilities

·         With a strong value proposition, the business continues to win the trust of Kirana partners across the country

·         Consumer brands business is on a strong growth path with all categories performing well

·         During the quarter, the business grew its product range with the addition of Maliban (biscuits), Raskik (beverages), and Toffeeman (candy) to its portfolio

·         JioMart delivered its best quarter with robust growth across categories

·         Hamleys & Urban Ladder are now live on the platform and JioMart is seeing a sustained uptick in non-grocery category contribution

·         Pharma business (Netmeds-online) continues to show steady growth across channels and geographies

Comments by Reliance Retail ED Isha Ambani:

“Reliance Retail continues on the path of registering industry-leading growth year after year at a scale unmatched in India. At Reliance Retail we remain committed to delivering exceptional value to our customers while driving sustainable growth for our business and various stakeholders in the ecosystem. Our focus is on customer-centricity backed by investments in technology, innovation, and new business segments that have helped us create operational excellence and steer the transformation of India’s retail sector."

O2C (Oil to Chemical) business:

·         Revenues increased on account of higher average crude oil prices and improved price realization for transportation fuels

·         Exports increase led by higher price realizations despite lower downstream product volumes

·         Access to the global market and the ability to place products to end consumers helped in realizing better margins.

·         Souring of advantageous crude/feedstock from outside the region, given the volatility and constraints, lower fuel mix cost due to improved Gasifiers availability added to the margins

·         The introduction of SAED on transportation fuels adversely impacted earnings by Rs.66.48B crore for FY23

·         The fall in quarterly revenue is primarily on account of a sharp reduction in crude oil prices and lower price realization of downstream products

·         EBITDA and EBITDA margin improved by strength in transportation fuel cracks, optimized feedstock cost, and advantageous ethane cracking economics, while partially offset by lower polyester chain margins. SAED on transportation fuels adversely impacted earnings by Rs.7.11B

·         As part of the Company’s strategy to expand its downstream polyester business, two consumer-focused acquisitions were completed during the quarter-Sintex Industries and Shubhalakshmi Polyesters & Polytex

·         Global oil demand in Q4FY23 rose +0.8 mbpd to 100.4 mbpd, due to higher demand from the US, Middle East, and Asia (Ex-China)

·         Higher refinery throughput following strong product cracks resulted in the higher crude oil demand

·         Strong growth in Jet/Kerosene and gasoline demand offset a moderation in diesel demand

·         Oil slips due to resilient Russian oil supply post-EU ban, relatively lower effective production cuts announced by OPEC+, and continuous inventory build-up

·         Gasoil cracks remained firm during Q4FY23 with continuing -political uncertainty, sanctions on Russian oil products, and increased travel demand

·         Gasoil cracks are expected to settle lower with higher-than-expected diesel exports from Russia and lower LNG prices

·         Global refinery throughput was higher by +1.1 mbpd (y/y) and flat sequentially at 81.1 mbpd

·         Domestic demand of HSD, MS & ATF increased by 6.7%, 9.8% and 38% respectively (y/y) in Q4FY23

·         Domestic demand for polymer and polyester increased by 20% and 9% respectively (y/y) in Q4FY23

·         The government of India continued with SAED (windfall tax) on exports of transportation fuels which are being reviewed every fortnight depending upon cracks in the international market

·         PP and PE demand was up by 6% and 8% respectively with domestic markets witnessing healthy demand from sectors such as consumer durables, furniture and households, automotive, and e-commerce food packaging

·         PVC demand improved by 32% supported by a sharp correction in prices (-31%) and healthy pipe demand from the agriculture and infrastructure sector

·         A robust supply chain network and superior customer service supported optimal product placement in the domestic market

·         RIL continued to maintain a leadership position in the domestic polymer market

·         PFY, PSF, and PET domestic demand improved by 10%, 17%, and 28% respectively with the resumption of schools, offices, festivities, and increased tourism

·         High global and domestic cotton prices aided the switching from cotton to polyester

·         PX margins were under pressure due to global overcapacity and higher energy costs, while China PTA margins remained firm during the year

·         MEG margins continued to remain weak with lower downstream demand in China coupled with new capacity additions

·         Polyesters product margins declined amidst slower China recovery, subdued export demand due to high inflation in the US, and recessionary trends in Europe

·         Polyester chain margin was $ 549/MT during FY23 as against $ 602/MT in FY22

·         In Q4FY23, PFY and PSF demand improved by 8% and 5% respectively on a Y/Y basis

·         PET demand was up by 15% as converters geared up for the upcoming summer season and anticipated beverage consumption

Transportation Fuels:

·         Singapore gasoline 92 RON cracks rose by $3.3/bbl Y-o-Y and averaged at $14.7/bbl in FY23 from $11.4/bbl in FY22

·         Cracks improved due to increased demand as travel slowly returned to pre-pandemic level on easing of COVID-19 restrictions, increase in China demand, and US refinery outages

·         Singapore gasoline 92 RON cracks rose by $3.3/bbl Y-o-Y and averaged at $14.7/bbl in FY23 from $11.4/bbl in FY22

·         Cracks improved due to increased demand as travel slowly returned to pre-pandemic level on easing of COVID-19 restrictions, increase in China demand, and US refinery outages

·         Singapore Jet/Kerosene cracks rose by $23.8/bbl Y-o-Y and averaged at $32.9/bbl in FY23 from $9.1/bbl in FY22

·         Cracks were higher due to increased travel after the lifting of pandemic restrictions; during the year China eased its domestic and international travel restrictions

·         Singapore Gasoline 92 RON cracks were flat Y-o-Y at $15/bbl in 4QFY23 ($15.1/bbl in 4QFY22) due to firm demand but surged Q-o-Q by $9.9 /bbl from $5.1/bbl in 3QFY23

·         Cracks surged sequentially due to higher imports by the US amid outages and turnaround season, reduced China exports on increased domestic demand

·         Singapore Gasoil 10-ppm cracks increased Y-o-Y to $28.6/bbl in 4Q FY23 from $21.6/bbl in 4QFY22

·         Cracks increased due to uncertainty of Russian barrels amid sanctions, higher European demand, and lower inventories

·         However, it declined Q-o-Q by $ 12.9/bbl from $41.5/bbl in 3Q FY23 due to subdued economic activity on recession fears, lower than expected loss of Russian gasoil post ban, and unusually mild winter season limiting the diesel demand

·         Singapore Jet/Kero cracks increased Y-o-Y to $26.5/bbl during 4Q FY23 from $ 16.2/bbl in 4QFY22; cracks were stronger due to higher demand on increased travel and tourism

·         However, it declined Q-o-Q by $7.0/bbl from $33.5/bbl in 3Q FY23 due to cracks moderating in line with gasoil cracks despite higher demand

Jio-BP update:

·         Reliance BP Mobility Limited (operating under the brand Jio-BP) has continued servicing customers across the 1,561-strong country-wide network, supporting channel partners despite the difficult operating environment

·         Backed by industry-leading technology, the aviation business has delivered a strong performance for the last two years

·         Leveraging the energy transition, Jio-BP is working on expanding the delivery network for CNG, Bio-CNG, and EV charging. With 1360+ live charging points and 1,60,000+ swap sessions, Jio-BP continues to sustain the growth momentum in EV charging. CNG network presence has reached 7 states with an aggressive expansion plan.

Oil & Gas (Exploration & Production) Business:

·         Segment Revenues and EBITDA were up 120.3% and 149.0% respectively. This was mainly due to higher price realization along with an increase in gas production as compared to FY22

·         The average price realized for KGD6 gas was $ 10.6 /MMBTU in FY23 vis-à-vis $ 4.92 / MMBTU in FY22. The average price realized for CBM was $ 21.63 /MMBTU vis-à-vis $ 6.82 / MMBTU in FY22

·         4Q FY23 Revenue more than doubled as compared to 4Q FY22 mainly on account of higher price realization and a 13% increase in KGD6 gas production

·         The average price realized for KGD6 is $ 11.39 /MMBTU in 4Q FY23 vis-à-vis $ 6.13 / MMBTU in 4Q FY22

·         The average price realized for CBM is $ 19.57 /MMBTU vis-à-vis $ 7.638 / MMBTU in 4Q FY22

·         EBITDA increased sharply to ₹ 3,801 crore which is up almost 2.5x on a Y-o-Y basis. EBITDA margin was at 83.4 % for 4Q FY23 up by ~60 bp as compared to 4Q FY22

·         With incremental gas production from the MJ field, along with ongoing production from R Cluster and Satellite Cluster fields, Block KG D6 production is expected to reach ~30 MMSCMD in FY24

·         KG D6 to contribute 30% of India’s gas production – key energy transition fuel

Regulatory Update

·         Ceiling price applicable for KGD6 has been revised to ~$12.12/MMBtu for H1FY24

·         The government has amended 2014 guidelines applicable to APM Gas

·         Unified tariff regulations for gas pipelines have been implemented from April 1, 2023, which is expected to benefit customers in far-flung areas and facilitate the development of gas markets in India

Viacom18 (Media Business):

·         FY23 consolidated revenue grew +5.8% despite a weak revenue environment and economic headwinds

·         The movie production segment delivered a strong slate of movies and the sports vertical made a spectacular debut with properties like FIFA World Cup and Women's Premier League (WPL)

·         Withdrawal of Colors Rishtey from the FTA DD Free Dish platform had an impact on the advertising revenue during the year but will help the Company strengthen subscription revenue in the long-term

·         Despite the constrained advertising budgets of consumer companies and startups due to the high inflation and funding crunch respectively, the advertising revenue of the Company was flat on a Y-o-Y basis

·         The Group made investments across business verticals to gain a competitive edge and saw impressive results with Colors consolidating its strong #2 position in the Hindi GEC space, TV News network’s channels rising to leadership, and Digital News maintaining its status as #2 online news publisher; These initiatives resulted in 27% increase in overall operating costs

·         Sports and Digital verticals are in an investment phase and had an impact of ~ ₹ 475 crores on EBITDA

·         Finance cost was higher due to the increase in short-term borrowing at Viacom18, primarily driven by the expansion of the Sports vertical

·         In Q4FY23, the TV News segment grew driven by the growth in advertising revenue

·         Excluding the movie production segment which has project-based volatility, revenue was marginally up with growth across all verticals

·         TV News reported a sharp Q-o-Q improvement in EBITDA and margins

·         Consolidated EBITDA was down primarily due to Viacom18’s investments in new initiatives (Sports and Digital verticals had an impact of ~₹ 170 crore on EBITDA) and a lag in recovery of ad revenues

·         Upbeat Jio Cinema performance amid the ongoing IPL fever and also WPL final match previously

·         The entertainment segment has around 10.7% viewership share and was boosted by Colors brand of channels in various key regional languages and Hindi

·         TV news has around 11.9% of the viewership share supported by News 18 India, CNN News 18, CNBC TV 18/AWAZ (Business news)

·         Digital news supported by Money Control, CNBC TV 18, and First Post

·         The partnership between Jio Cinema/Reliance, Bodhi Tree Systems, and Paramount Global will help Viacom18 to lead innovation and disruption in the Indian M&E space.

Overall update:

·         Capital allocation policy aligned with growth trajectory and sustainable value creation

·         Growth initiatives backed by more robust cash flows, comfortable leverage

·         Over the last two years, cash profits have funded 98% of capex

·         Net debt significantly below 1x EBITDA

·         Higher debt primarily to cover higher WC requirements and FX/cross currency liabilities/headwinds

·         The continuing emphasis on:

o   Disciplined capital allocation to support growth initiatives, largely through internal accruals

o   Retaining superior investment-grade ratings

o   Maintaining Net Debt to EBITDA at below 1x

·         Strong cash generation and a superior credit profile provide flexibility to deploy capital in a disciplined manner

·         Developing affordable renewable energy ecosystem, ensuring progress towards the Net Zero target and a sustainable future

·         Allocating capital towards energy transition initiatives could generate and that could be the next phase of earnings

·         Energy businesses accounted for 57% of incremental growth

·         The energy business continues to generate strong cash flows through the commodity cycles and despite the

·         macro disruptions

·         Jio and retail have grown their EBITDA at 50% CAGR over the last two years and 25% during three years of COVID

·         For export-savvy O2C business, cautiously optimistic about FY24 amid high volatility in oil prices, a possible flare-up of crude oil due to OPEC+ production cut, higher exports by China (refined products) and any recession/severe economic slowdown in the U.S. and EU amid lingering macro-headwinds

·         Continued focus on O2C cost optimization with a customer-centric solution

·         Overall focus on strong earnings growth and balance sheet

Fair Valuation: RIL

The present fair value of RIL may be around 2571/- and RIL may scale 2956/- by Dec’23, 3400/- by Mar’24, 3910/- by Mar’25, and 4496/- by Mar’26

 

In FY23, RIL reported the core operating EPS at 182.29 vs 141.72 in FY22 (+28.62%) vs 92.39 in FY21 (impacted by COVID) and 104.42 in FY20 (pre-COVID). RIL was a story of a ‘K’-shaped economic downturn during COVID due to a global/domestic lockdown; its O2C business was severely affected along with consumer-facing/contact-sensitive other businesses (like Retail). Only digital business (R-JIO) was a beneficiary of COVID-related disruptions.

In FY23, RIL was a big beneficiary of the Russia-Ukraine/NATO/U.S. war/proxy war/geo-political tensions and subsequent economic sanctions on Russian oil, especially in Europe/EU. RIL bought Russian oil cheap, refined it, and sold the same with a good margin as eventually Europe/EU has to buy gasoline/other oil-refined products from somewhere (instead of Russia) for its requirements. Various other Indian and also Chinese refiners are exporting such cheap Russian-sourced oil to the EU after refining the same and earning ‘windfall’ profits.

But the EU is now raising various political objections to such back door entry of Russian oil by Indian and Chinese refiners. In 2^nd week of May’23, the EU Foreign Policy Chief Borrell said: "If diesel or gasoline is entering Europe-- coming from India and being produced with Russian oil, that is certainly a circumvention of sanctions and member states have to take measures. That India buys Russian oil, it's normal--- But if they use that to be a center where Russian oil is being refined and by-products are being sold to us--- we have to act".

But officially, the EU refrained from point-fingering to India and preferred to have a discussion on the issue with the essence of cooperation, keeping in mind good diplomatic relations with India (under the Modi admin). Indian Foreign Minister Jaishankar blasted the EU for such Russian oil comments, reminded the EU to look into its record for importing Russian oil directly/indirectly, and also pointed out that as far as his understanding of EU sanctions rules, Russian crude substantially transformed/refined in a third country was no longer considered to be a Russian product, and may be exported to EU (without breaking any sanction rules).

Although the EU may not take any serious action on Indian oil refiners like RIL at this time considering good diplomatic relations with India/Modi admin and PM Modi’s ability to maintain good relations with both Russia-U.S./EU, there is a risk in RIL’s EU oil revenue in future. Also, if there is a peaceful resolution of the Russia-Ukraine war and subsequent lifting of oil sanctions on Russia by the EU (for their interest) in the coming days, RIL’s EU business for O2C may be negatively affected (at least EBITDA margin).

Now looking ahead, considering the current quarterly run rate, previous trends, and various commentaries by the company/management, higher EU refining margin at present, but EU sanctions risk in the future, higher digital/telecom ARPU, higher borrowing costs, and partial effect of a windfall tax, the FY: 24-27 core operating EPS may grow around +15% CAGR on an average rather than our previous estimate of +20%.

Similarly, if we consider BVPS (at around 15% CAGR), and OCFS (at around 15% CAGR) and assume fair average PE of 15 (EPS), P/B of 2, and P/OCFS of 15, the average fair value (EPS+BVPS+OCFS) may be around Rs. 2956-3400-3910-4496 (FY24-27); current fair value around Rs.2571. As the financial market generally discounts 1Y earnings/EPS in advance, RIL may scale 2956/- by Dec’23, 3400/- by Mar’24, 3910/- by Mar’25, and 4496/- by Mar’26.

Conclusions:

For FY24, RIL’s earnings may be dragged by lower refining margin/O2C income due to any EU sanctions/adverse actions, higher Chinese supply, and unfavorable movement of crude oil/spreads, while maybe boosted by upbeat retail and digital/telecom business amid expansion & diversification (both organically and inorganically). RIL’s FY24 earnings may be also boosted by the growing gas exploration and production business in India, being supported by the Modi admin as Indian NG producers are getting much higher prices than prevailing global prices. RIL is now actually incubating various consumer-facing businesses along with green energy, thanks to prudent CAPEX/investment. We may see potentially higher core operating EPS from FY24-26 onwards.

RIL reported negative FCF (Free Cash Flow) in FY19, FY21, and FY23 due to elevated oil/O2C and telecom/digital/retail capex. RIL has free positive cash flow in FY22 as it has completed the previous capex cycle in FY21. Going forward the market is concerned about negative FCF in FY24-26 due to the proposed Rs.75B green capex along with incremental with retail/digital/telecom capex. For RIL, consistently higher capex due to the expansion of existing business and diversification into a new business is resulting in lower ROCE (return of capital employed) and ROE (Return on Equity).

The market was expecting a much lower initial green capex from RIL due to the poor visibility of the green economy in the next few years for a country like India. Overall, the long gestation period nature of RE and depressed FCF may keep RIL’s gross debt at elevated and ROCE/ROE at muted levels in the coming years amid falling EBITDA margin for its cash-cow patrochem business. But that perception is now fast-changing as the world is now moving towards a green economy and digital/5G narrative.

For Mukesh Ambani, data is like new oil (unlimited); petchem profit was the main support for cash-burning telecom and retail business. But when petchem/O2C cash flow slows, it is bound to affect other startup ventures (RE, digital, and retail). But now both retail and digital/telecom businesses now generating positive EBITDA/cash flow and RIL may also deleverage by listing the same in the coming days.

In the last decade, RIL generated consistently negative FCF 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).

Raising debt or equity was never a problem for a company like RIL, because of the market trust in its management/Chairman Mukesh Dhirubhai Ambani (MDA). But, as a visionary and debt-shy entrepreneur, MDA knows very well when to sell out the stake of a profitable business to slash huge debt (unlike his younger brother ADA), especially when borrowing cost is elevated.

In 2020, just after the COVID lockdown started locally and globally, RIL deleveraged at a record pace for its digital (Jio) business, taking the advantage of COVID theme, when the world runs on data, not oil. MDA was also able to sell a part of his retail business. RIL also divested a significant part of its Jio network assets (telecom Tower) to Brookfield.

RIL also entered a JV with BP for 49% of its Petroleum (fuel-marketing) business for $1B. Before COVID, the market cheered the RIL-Saudi Aramco MOU, which was likely to be converted into a $15B deal (20% stake including 51% stake of petroleum JV). Saudi-Aramco valued RIL at $75B enterprise value, which may be far higher than the fair market valuation at that time. But the deal with Saudi Aramco didn’t go through later due to the subdued prospect of the fossil fuel industry amid the global transition to green energy rhetoric. Again, after the Russia-Ukraine war, oil shoots up as there is not enough spare capacity amid muted oil capex. The narrative of the green transition may be too fast without an alternative arrangement. The world is again turning back to fossil fuels.

Overall for RIL, it’s the story of deleveraging and thrusting into a new business model as per evolving economic scenario. RIL’s digital and even retail business (essential/grocery items) was also a part of the K-Shaped economic boom after COVID. RIL will now gradually transform itself from a fossil fuel (oil) heavy business to green fuel (RE) along with digital and retail (consumer business). Visionary MDA 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.

The transition from black to green energy will also act as a huge infra/green stimulus to set up an affordable green energy ecosystem (like EV, charging stations, EV batteries, solar batteries, etc). Also, incrementally higher green capex and lower oil capex may result in a demand/supply mismatch in the coming years. Oil may jump further due to lower production, which is positive for RIL’s O2C business margin (higher spread/realizations). After the Russian invasion of Ukraine, the oil refining business is also turning out a major boost for RIL as India/RIL can buy Russian crude oil at a relatively lower price and sell the refined product at higher prices to Europe without inviting any US sanctions. India, now under the political leadership of PM Modi, can maintain good relations with both Russia and America, keeping its interests at the forefront.

Looking ahead, RIL may hive off (monetize) parts of its oils-to-chemicals (O2C) division to make it easier to induct investors and unlock value after it scrapped a plan to sell a $15B stake in the business to Saudi Aramco. As the first step of the new strategy, RIL decided to transfer the company’s gasification assets to a wholly-owned subsidiary around late Oct’21. RIL is looking at the elements of the O2C business in light of its net carbon zero goals and may also hive off more such businesses.

RIL is investing Rs.75B (around $10B) over the next three years in green energy initiatives, including the Dhirubhai Ambani Green Energy Giga Complex in Jamnagar, as the refining and petchem major shifts its focus from hydrocarbons to renewable power. RIL has set itself a target to become a net-zero carbon company by 2035.

RIL invested $4B in setting up 10 synthetic gasifiers in 2012 to convert petcoke, one of the dirtiest refinery by-products, into gas to meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 MT a year, as generated from two of its cokers. The technology for petcoke gasification, RIL said in 2012 would help it produce 23 mscmd (million standard cubic meters a day) of syngas and will aid in reducing R-LNG (regasified-liquefied natural gas) intake for its refineries. The project, however, saw a three-year delay by when the LNG prices moderated. RIL said it seeks to attract strategic investors for the gasification and new materials/chemical projects.

RIL’s move to separate its petcoke gasifier assets is another step toward monetizing the potential synergies between its existing energy infrastructure and new energy plans. While investors have been skeptical about returns on the petcoke gasifier business for the past five years, the environment of high global gas prices, the gasifier’s ability to produce hydrogen, which can be converted into blue hydrogen (using carbon capture), and gasifier output of syngas (valuable in producing higher value add chemicals)—all now make it a highly profitable investment after multiple years of challenges.

Looking ahead, apart from the demerger/restructuring, and green energy move, RIL may also hike tariffs for the telecom business and expand/diversify in the retail business. Also, higher USDINR will be positive for INR as almost 40% of its revenue comes from export. The O2C business contributes almost 62% of its revenue followed by retail (around 27%) and digital business (around 3%) on average.

RIL has the world’s biggest oil refinery complex in Jamnagar (Gujrat) and it’s a major beneficiary of the protracted geopolitical conflict/proxy war between Russia and the U.S./NATO over Ukraine. Russia has no choice but to sell its oil at discounted prices to India and China for the sake of revenue and the economy. RIL operated its refinery at around 92% in April’22 against IOC’s 108% to cater to elevated European diesel demand. Many European refineries had stopped Russian crude oil due to G7 and also self-imposed sanctions for the Ukraine invasion.

In any way, SGX GRM plunged from the peak of $30.5 to almost $3.90 in Q2FY23 on the concern of a synchronized global recession. But Chinese COVID reopening and cheap Russian crude oil are also supporting the GRM. RIL’s refinery processes a higher proportion of diesel and thus generally RIL GRM comes higher than SGX GRM. Every $1 increase in RIL GRM may translate to around $500M of EBITDA for RIL. Thus even after assuming normalization in the coming days, RIL’s GRM for FY24 may come to around $12 instead of the $10.5 earlier estimated.

The trajectory of GRM will also be dependent to some extent on the trajectory of the Russia-U.S./NATO proxy war over Ukraine. And till now there is no sign of any peace between Russia and Ukraine as the latter is not ready to sign any truce/ceasefire agreement instead of territorial integrity and sovereignty. Also, U.S./NATO will not withdraw various economic sanctions on Russia in a hurry even if there is some kind of ceasefire agreement. Thus GRM is likely to be elevated at least till Q2FY24 and this will boost refining profit for RIL further. And China’s reopening may also help higher GRM and petchem margins.

In 2022, despite tight inventory, diesel cracks corrected from $36 to $12, while Jet/ATF cracks also corrected from $28 to $13 mainly due to the Chinese lockdown and slowdown in fuel utilization. Global petchem margin was at a multi-year low due to lower prices of PE, PP, and PET amid subdued demand from China despite a recent surge in Naphtha (feedstock) prices. For RIL, the impact was lower due to its integrated operations –it captures the Naphtha spreads. But as RIL is also the largest buyer of its gas (NG), the overall standalone EBITDA margin falls to some extent.

For RIL, the expected recovery in the O2C/petchem business along with ongoing/rapid expansion of retail (including pharma, and grocery) and higher realization/strong growth in JIO may ensure around 20-25% growth in core operating EPS in FY24, followed by at least 15% CAGR in subsequent years. Reliance is now fast replacing (rebranding) closed (defaulted) ‘Big Bazar’ mall/shopping space with ‘Reliance/Smart Bazar’ across the country (almost 950 stores at various prime locations). But considering recent EU comments about the back door entry of Russian oil into the EU through Indian refineries such as RIL, we estimated 15% growth for core operating EPS in FY24 (with upside risk).

Thus oil to retail and telecom/digital business coupled with a new venture into emerging green business (EV) and deleveraging prospects in the coming years, RIL should be an attractive portfolio investment. With the credibility of Mukesh Ambani, impeccable management, a strong balance sheet, and the ability to raise funds at a cheaper cost for startup projects, RIL is now an ideal stock to reflect India's growth story.

As RIL is always expanding or diversifying, its FCF often turns out negative as it’s employing cash for the next leg of growth even after attractive returns for shareholders (dividend, etc). RIL scrip, which was around 500.00 in early 2017, rallied over +470% in 5 years to 2855.00 in late Apr’22. Looking ahead, RIL may also foray into EV/car business by acquiring MG Motors (Chinese stake) in India. Recently, RIL withdrew from FRL(Big Bazar) bid under IBC, but RIL has already acquired most of the Big Bazar premises (shopping mall) in various prime locations and operating ‘Smart Bazar’, which is equivalent to acquiring ‘Big Bazar’ indirectly (back door entry). In brief, RIL may be now fast turning India’s ‘Desi Wall Mart with a flavor of Amazon, BP, and even Tesla’. In the future, RIL may also launch an EV app cab service like Ola/Uber (ride-hailing) to leverage its EV/energy ecosystem.

Technical View: RIL (LTP: 2444; EOD: 19/05/23)

Looking ahead, whatever may be the narrative, technically RIL has to sustain over 2535 for any further rally towards 2575/2600-2635/2700 and 2760*/2815-2855*; otherwise sustaining below 2510, it may again fall to 2465/2430-2395/2345*, and further 2305/2250*-2200/2180* zones in the coming days. For the time being, 2345/2305-2250/2180 is a good positional support zone for investment buying/accumulation purposes.

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