---

RIL recovered on hopes of higher GRM amid lingering Russian sanctions

Previously RIL plunged on the subdued report card (Q4FY22) and no comments by the management about R-JIO and R-Retail listing

---

RIL made a fresh lifetime high around 2856.15 on 29^th April in hopes of a blockbuster report card for Q4FY22 and a market buzz that RIL may soon list R-JIO and R-Retail to deleverage its balance sheet. But RIL soon slips from the lifetime high as there was no indication from the management about such deleveraging move/listing of R-JIO and R-Retail. Moreover, RIL tumbled to a low of around 2370.00 on 12^th May; barely 6-days after the company published the subdued Q4FY22 report card. RIL stumbled almost -17% from its lifetime high in a matter of a few days.

But on 20^th May, RIL soared almost +5.83% on reports of higher GRM as the refining giant is purchasing a huge quantity of distressed Russian oil directly/indirectly at a heavy discount. Also, there was again the buzz that RIL may soon list R-JIO and R-Retail to deleverage its balance sheet. Subsequently, RIL made a high of around 2656.70 on 25^th May, around levels on the day of the Q4FY22 report card.

Highlights of RIL report card: Q4FY22 (Consolidated)

 

 

·         Core operating Revenue Rs.2.12T against Rs.1.91T sequentially (+10.78%) and Rs.1.55T yearly (+36.79%)

·         Core operating expenses Rs.1.81T vs 1.62T sequentially (+11.73%) and Rs.1.32T yearly (+37.23%)

·         EBITDA around Rs.0.31T vs Rs.0.30T sequentially (+5.59%) and Rs.0.23T yearly (+34.32%)

·         Net interest payment around Rs.3.5B vs Rs.3.81B sequentially (-6.72%) and Rs.4.04B (-12.07%)

·         EBTDA (EBITDA-INTT); i.e. core operating profit around Rs.0.28T vs Rs.0.26T (+7.40%) and Rs.0.19T yearly (+44.04%)

·         EBTDA margin 13.12% vs 13.54% sequentially (-0.41%) and 12.46% yearly (+0.66%)

·         EBITDA margin 14.80% vs 15.52% sequentially (-0.73%) and 15.08% yearly (-0.27%)

·         EBTDA/Share; i.e. core operating EPS at Rs.41.11 vs 38.28 sequentially (+7.40%) and Rs.Rs.29.96 yearly (+37.23%)

Highlights of RIL report card: Q4FY22 (Standalone)

 

·         EBITDA Rs.0.15T vs Rs.0.14T sequentially (+4.94%) and Rs.0.10T yearly (+43.33%)

·         EBTDA Rs.0.13T vs Rs.0.12T sequentially (8.65%) and Rs.0.07T (+75.64%)

·         EBTDA margin 9.40% vs 9.88% sequentially (-0.47%) and 8.34% yearly (+1.06%)

·         EBITDA margin 10.88% vs 11.84% sequentially (-0.95%) and 11.83% yearly (-0.95%)

Also, the overall performance of R-JIO was subdued amid continuous loss of subscribers despite higher ARPU (Rs.167.60 vs 151.60 sequentially). At a glance, apart from EBITDA margin, all the other vital parameters improved sequentially, but EBITDA and EBITDA margin were also below market expectations.  This along with no comments/guidance on R-JIO and R-Retail dragged the stock soon after the Q4FY22 report card and concall.

The RIL Chairman and MD Ambani said:

Despite the ongoing challenges of the pandemic and heightened geopolitical uncertainties, Reliance has delivered a robust performance in FY2021-22. I am pleased to report strong growth in our Digital Services and Retail segments. Our O2C business has proven its resilience and has demonstrated strong recovery despite volatility in the energy markets.

Our relentless focus on customer satisfaction and service has led to higher engagement and increased footfalls, driving robust revenue and earnings figures across our consumer businesses. The gradual opening up of economies coupled with sustained high utilization rates across sites and the improvement in transportation fuel margins and volumes have bolstered our O2C earnings.

During the year, Reliance has also been able to generate significant employment opportunities for the people of our country and continues to remain amongst India’s largest private-sector employers. Over the past year, we added over 2.1 lakh, new employees, across our businesses with our consumer and technology business creating a large part of these new jobs.

I am pleased to report that our Retail business has crossed the 15,000 store benchmark. JioFiber is now the largest broadband provider in India within two years of launch. The oil and Gas business is now contributing 20% of domestic gas production.

I am particularly happy with the progress our company is making in the New Energy and New Materials business. We are forging ahead with the development of our New Energy Giga Factories complex across 5,000 acres in Jamnagar. And with the strong global partnerships we have, I am confident that Reliance will create sustainable and affordable new energy solutions for India to help her meet growing energy needs while ensuring that we achieve our ambitious target of Net Carbon Zero by 2035.”

Highlights of earnings concall:

·         The robust trend of EBITDA; 5-year CAGR around +17.7%

·         FY22 EBITDA was led by O2C, oil & gas, retail, and digital services (R-JIO)

·         Diversified earnings capturing advantage of economic revival post COVID

·         All operating segments contributing to EBITDA growth

·         In Q4FY22, O2C – firm despite volatility caused by the Ukraine conflict as Strength in fuel cracks offset by weak downstream chemical margins and high energy cost

·         Oil & Gas – lower EBITDA reflecting exit from US Shale

·         Retail – impacted by headwinds posed by COVID/Omicron spikes in January and lower investment income

·         Digital Services – strong gross subscriber addition and higher ARPU reflecting the benefit of the tariff hike

·         Others – reflect lower investment portfolio and defensive repositioning for higher yields

·         Gross debt Rs.2.66305T vs 2.55891T sequentially and 2.51811T yearly

·         Net debt Rs.34.815B vs -3.585B sequentially and -2.208B yearly

·         Additional debt reflects refinancing of high-cost spectrum liabilities of Rs.30.791B with cost-effective market borrowings

·         JIO ARPU jumps from Rs 151.6 to Rs 167.6 sequentially with improving subscriber mix and tariff hike; Q4FY21 ARPU was Rs.138.20

·         The total customer base of 410.2 million as of March 2022; SIM consolidation post tariff hike resulting in net subscriber reduction

·         Upbeat FTTH broadband business despite COVID disruptions

·         Ready for 5G rollout

·         Data traffic growth continues to be strong at 48% (y/y)

·         RJIL revenue is up 8.0% sequentially and 20.4% yearly with a partial impact of the tariff hike

·         EBITDA margins at 50.5% leading to EBITDA growth of 27.0% (y/y)

·         Reported RJIL EBITDA  aroundRs.10.554B vs Rs.9.669B sequentially and Rs.8.313B yearly

·         R-Retail revenue Rs.1.99704T in FY22 vs Rs.1.57629T in FY21 and Rs.1.62936T in FY20 (around 43% CAGR)

·         R-Retail EBITDA around Rs.12.381B in FY22 vs Rs.9.789B in FY21 and Rs.9.683B in FY20 (around 59% CAGR)

·         EBITDA margin 7.3% vs 7.5% sequentially and 8.8% yearly

·         Added 2500 retail stores in FY22; total stores crossed 15000 milestones; share of business around 17%

·         Bolstered capabilities through acquisitions and partnerships

·         Resilient performance from small towns – led business recovery

·         Grocery records all-time high revenues – strong growth across all channels

·         Looking ahead: Accelerate store network expansion; Strengthen digital commerce & Omnichannel capabilities across businesses; Onboard merchant partners across categories and geographies; Augment product design and sourcing capabilities; grow own brand portfolio; Scale-up new businesses

·         Oil & gas business:

·         A significant operational turnaround with the ramp-up of KGD6 production; Segment EBITDA at a 7-year high; Domestic production at a 9-year high

·         Progressive linkage of domestic gas prices to international benchmarks through the year

·         Q-o-Q EBITDA is lower with the divestment of the US Shale business

·         Domestic production is marginally lower

·         Lower production from KGD6 due to well intervention /tests and the natural decline in CBM Production

·         EBITDA margin declined 190 bps – higher OPEX due to one-time maintenance activity

·         Gas prices continue to remain elevated amid the Russia-Ukraine Standoff

·         The global LNG market is likely to remain tight with limited new supplies and incremental demand from Europe as it seeks to diversify away from Russian supplies

·         India's gas market outlook remains positive amid growth in pipeline infrastructure and CGD networks

·         Short term impact on demand due to high gas price

·         RIL contributes around 20% of total domestic gas production

·         O2C (Oil to Chemical) business:

·         EBITDA Rs.14.552B, which is 52% of the incremental EBITDA, on the back of higher fuel cracks, especially mid-distillates, and also higher volume

·         Global oil demand improved in FY22 with the easing of restrictions and vaccination drive

·         But global oil demand declined 2 mbpd in Q4FY22 sequentially

·         Rising oil prices due to the Russia-Ukraine conflict

·         India's polymer and polyester demand improved marginally with the opening of the economy, constrained by a volatile price environment

·         Domestic oil demand growth is led by increased road travel and air passenger traffic

·         Global cracker operating rates are impacted by volatility in international energy prices amid the Russia-Ukraine war and Winter Olympics and fresh lockdowns in China

·         Transportation fuel margins at 24-36 quarter high amid continuing demand recovery and low inventory, while sanctions on Russia resulted in higher demand for Asian refined products to EU; also there were limited Chinese exports

·         The sharp increase in energy prices due to supply constraints

·         Oil at 10 year high driven by Russia Ukraine conflict, European bid for incremental LNG supplies, and self-sanction by some EU companies; fuel margins at multi-quarter high

·         Domestic oil demand growth was constrained by high prices and COVID disruptions in FY22, but signs of recovery in Q4

·         Oil demand is expected to average 99.4 mbpd in 2022, up 1.9 mbpd (y/y)

·         Lowering of global GDP and oil demand growth forecast due to Russia-Ukraine conflict

·         Potential lower Russian crude and product exports; sanctions keeping large importers away

·         Low Chinese exports and peak maintenance season to support product margins

·         Reduced diesel imports by Europe from Russia and low global inventories to support margins

·         PX, PTA, and MEG margins are expected to be range-bound due to capacity overhang

·         Resilient Industrial demand as economies reopen and seasonal rise in agricultural demand

·         Higher driving activity in summer to increase gasoline demand

·         Polyester / Polymer demand is expected to improve with the opening of the economy and return to normalcy

·         Risks

·         Virus resurgence in China and unprecedented oil prices, impacting demand

·         Supply chain disruptions & logistics issues continue to impact global trades

·         Possibility of further sanctions on Russia, impacting supplies from the country

Valuations: Rs.2953.00 and Rs.3543.00 by FY23 and FY24

 

In FY22, RIL reported the core operating EPS at 141.72 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 shutdown; its oil and gas 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.

Now looking ahead, considering the current quarterly run rate, previous trends and various commentaries by the company, the FY23 core operating EPS should come around 177.15 at projected 25% growth; thereafter RIL may report around +20% CAGR for FY24-26. And assuming an average reasonable PE 15, the fair valuation of RIL maybe around 2953-3543-4252-5102 for FY23-26. Thus RIL may scale around 2953-3543 by Mar’23 and Mar’24.

For RIL, 15 may be a reasonable average PE, although comparatively, it may be on the lower side due to higher capex requirements for its green business.

Conclusions:

RIL often reported negative FCF (Free Cash Flow) in FY19 and 21 due to elevated oil and telecom capex. Although RIL has 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 FY23-25 due to the proposed Rs.75B green capex. For RIL, consistently higher capex due to 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. Also, RIL’s emphasis on 5G capex despite the 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/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 5G narrative.

For Mukesh Ambani, 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 will bound to affect other startup ventures (RE, digital, and retail).

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).

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 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 and oil may jump further due to lower production.

As a private refinery, RIL doesn’t enjoy any government subsidy for its Indian operations. Higher oil prices and higher oil taxes in India are resulting in abnormal retail prices for transportation fuel (petrol/diesel) and lower demand at retail levels. Thus RIL was also eager to sell a significant part of its refining business; but after the Russian invasion of Ukraine, the oil refining business is also turning out a major boost for RIL as India can buy Russian crude oil at a relatively cheaper price without inviting any US sanction. This is positive for RIL too.

Looking ahead, 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. R-Jio may be also listed in Nasdaq due to high FDI and some other regulatory/taxation factors.

RIL may hive off 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%).

RIL has the world’s biggest oil refinery complex in Jamnagar (Gujrat) and it’s a major beneficiary of protracted geopolitical conflict/proxy war between Russia and 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 has operated its refinery at around 92% in April against IOC’s 108% to cater to elevated diesel demand from Europe. Many European refineries stopped Russian crude oil due to G7 and self-imposed sanctions for the Ukraine invasion. Thus RIL maybe now enjoying high GRM

The market was expecting Q4FY22 GRM for RIL around $8.1, but RIL didn’t disclose the GRM figure surprisingly. Some estimates suggest a GRM of around $9 in FY22 and a projected $10.5 in FY23. The benchmark SGX GRM was $6.1 and $8.2 in Q3 and Q4FY22. Higher GRM was due to a tight supply of crude oil and product (diesel and ATF) amid Russian disruption. 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.

Now SGX GRM is hovering around a record level of $26 as around 1 mbpd of Russian refinery capacity is not functioning due to Ukraine war/economic sanctions and 3 mbpd global refinery capacity is still offline due to COVID disruptions. Thus even after assuming normalization in the coming days, RIL’s GRM for FY23 may come around $12 instead of the $10.5 earlier estimated.

The trajectory of GRM will be dependent 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 Q2FY23 and this will boost refining profit for RIL further, although overall petchem profit continues to be soft due to weakness in chain delta and lingering lockdown in China (zero COVID policy).

In March-April, 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. But going forward, China will gradually exit from its zero COVID lockdown policy from 1^st June as it’s hampering economic activity significantly.

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.

Looking ahead, petchem demand may recover as China will gradually exit from the zero COVID lockdown policy from 1^st June under new/renewed economic leadership from Premier Li. China’s President Xi is again handing over economic policy responsibility to his deputy Li as under Xi; various hardline regulatory moves invited more economic slowdown. Chinese economy/demand is expected to recover under liberal ‘Likonomics’.

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 25% growth in core operating EPS in FY23, followed by at least 20% CAGR in subsequent years. Reliance may replace the existing ‘Big Bazar’ mall/shopping space with ‘Reliance Bazar’ in the coming days. Thus oil to retail and telecom/digital business coupled with a new venture into emerging green business (EV) and deleveraging prospect in the coming years, RIL should be an attractive investment from around 2370-2180 levels (recent lows) if Nifty does not break 16600-16350 levels in the coming days.

With the credibility of Mukesh Ambani, impeccable management, 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. Thus RIL scrip, which was around 500.00 in early 2017, rallied over +470% in 5-years to 2855.00 in late Apr’22. Now the key risk is whether Western/European consumers shun RIL refined diesel as India and China now may ‘fund’ the Russian invasion of Ukraine by purchasing a huge quantity of Russian oil.

Looking ahead, whatever may be the narrative, technically RIL has to sustain over 2685-2695 for any meaningful rally towards 2855-2955; otherwise sustaining below 2670-2650, it may fall to 2510, and sustaining below may further fall to 2370-2180 zones, which may be a good demand level for the time being.

 

RIL: P&L account analysis

 

 

 

 

 

Articles

Comments