Reliance Industries Q2 Review: Analysts See Steady Earnings Outlook In FY24

Reliance Industries Ltd.'s full-year outlook is positive, according to analysts, given the strong scale-up in retail and telecom segments coupled with domestic demand pulling up its oil-to-chemicals segment.

• The standalone Q2 FY24 Ebitda at Rs 19,200 crore was fuelled by strong refining and PVC cracks and a rise in gas volumes.

• Oil-to-chemical earnings in Q3 FY24 may be tempered by plant shutdowns and weak gasoline margins.

• Over the next 1.5 years, the brokerage has built in healthy O2C profitability amid refining net capacity additions in CY24 (0.6 million barrels of oil per day), although it is trailing oil demand growth of 0.9 mbpd.

• The brokerage believes re-stocking can lead to a sharp uptick in margins.

• The brokerage values the refining and petrochemical segments at 7.5 times EV/Ebitda, arriving at a valuation of Rs 878 per share for the standalone business.

• It ascribes an equity valuation of Rs 760/share to RJio and Rs 1,353/share to Reliance Retail, factoring in the recent stake sale.

• The target price is adjusted for Jio Financial Services valuation. The brokerage reiterates a "buy" rating with a target price of Rs 2,760 against the current share price of Rs 2,266.

• Ambit believes RIL’s retail capex will remain elevated given their target of trebling FY21 revenues by FY26 and continued competition from deep-pocketed global giants in e-commerce.

• RIL’s revenue growth from consumer businesses is slowing despite increased support for consumer businesses by standalone operations.

• The company is unable to achieve non-linear scalability and success with digital revenue streams for Jio and new commerce for retail.

• The brokerage does not expect RIL to pull off any surprises with consumer IPO valuations.

• It values RIL’s standalone business at $90 billion, 100% of Jio at $85 billion (2020 investors paid $71 billion), and Reliance Retail Ventures Ltd. at $59 billion. Investors who want digital services and telcom duopoly upside should own Airtel instead, the brokerage said.

• The brokerage says its strategy team sees risks to Nifty’s FY24E EPS estimates led by RIL.

• The brokerage has retained its "buy" rating on RIL on the back of a steady earnings outlook and the peaking-out of the current capex cycle, which should entail free cash flow generation and debt reduction.

• It says the valuations are attractive and maintains Sep-24E TP at Rs 2,730/share against the current price of Rs 2266.

• RIL's outlook on the O2C business remains positive, with tight fuel markets, strong domestic demand and limited new builds.

• Global downstream chemical margin is expected to stay soft in the near term, while moderation in new supplies from China and demand recovery could help to improve overall margin.

• Current KG Basin gas output is ~29mmscmd and likely to touch 30mmscmd in the coming months, while CBM gas production is expected to be ramped up in Q4FY24.

• Jio expects 5G pan-India coverage by December 23, with 1 million 5G cells deployed across 8000 cities and towns in India as JioFiber scales up and tech stack upgrades continue.

• Retail momentum is expected to sustain itself as digital and new commerce scale up amid new launches and channel expansion initiatives.

• The brokerage largely retains its EV/Ebitda multiple for all segments.

• It has adjusted RIL’s stake in the retail business after the recent Rs 15,500 crore fund-raise.

• As per the brokerage, the key risks for RIL are adverse commodity and currency volatility, B2C competition, delays in the monetisation of ventures, and policy and new business risks.

• Reliance Industries current market cap equals the sum of its share in a $70 billion valuation for O2C,  $100 billion in recent transaction valuations for Retail, and $75 billion (10 times EBITDA; equal to peers).

• None of the earlier internet, tech, or option values are in the price anymore.

• The brokerages see an upside for RIL from higher retail valuations as Ebitda grows, the optionality of higher telecom Ebitda (tariffs, 5G monetisation), and RIL’s $9 billion capex in new energy (5 new gigafactories) and its other businesses (E&P, real estate, etc.).