Q1FY24 Review: Reliance Industries: O2C disappoints, B2C delivers!

24 Jul 2023 , 01:53 AM

RIL’s Q1FY24 PAT fell 11% YoY driven by the O2C segment (Ebitda down 23% YoY); Ebitda growth in E&P/ JIO/ Retail was 47%/17%/34% YoY respectively (in-line). RIL sees volatility in O2C segment, but strong E&P (27mmscmd in Q2 itself); Jio should focus on 5G rollout, while Retail on store rollout and profitability. The 10% pa earnings growth through FY25 is driven by non-O2C segments. On this backdrop stock trades close to its fair value, and will await clues on retail/Jio demerger in forthcoming AGM.

Weak O2C: 

RIL’s Q1FY24 PAT decline of 11% YoY belied estimates, as inline JIO/Retail/E&P performance was offset by a weak O2C, higher depreciation. Weak refining, shutdown of Hazira cracker, sluggish petchem margins, etc. led to 23% YoY fall in O2C Ebitda, while 47% YoY growth in E&P Ebitda was ahead; Retail’s 34% YoY Ebitda growth was backed by increase in store count (555 added) + core margins (7.9% vs 7.6% YoY), while JIO’s 17% YoY Ebitda growth was in-line. The share of B2C in overall Ebitda was 47% vs 45% QoQ and 39% YoY. The capex/net debt as of Q1 was Rs396bn/Rs1.27trn respectively; as part of de-merger, RIL transferred Rs155bn cash to JFSL (FY23 net debt up to that extent). 

Non-O2C to drive growth: 

RIL’s CFO during analyst meet explained that macro uncertainty would weigh high on the O2C business, but, other businesses are well placed to drive growth; E&P ramp up (27mmscmd) is at least 2 quarters ahead; JIO is aggressively targeting 5G roll out + FTTH + subscriber ramp up whereas Retail on track to add stores, expand portfolio and register steady earnings growth. RIL continues to remain silent on its green energy business, where it is investing ~Rs750bn.

All eyes on AGM: 

RIL’s consolidated earnings are set to register 10% pa through 25 on back of flat O2C earnings, ramp up in the E&P (volumes up 23% pa), moderate tariff hike in Jio in FY25 and 27% pa Ebitda growth in Retail. The cash flow generation and balance sheet should support ongoing capex on 5G rollout/retail etc. Analysts of IIFL Capital Services place base case SoTP at Rs2,654 per share which has upsides provided retail business surprises on execution + marked improvement in disclosures; green energy business can also add material value. RIL has successfully de-merged the Jio Financial Services (1:1 share issuance), for which investors would keenly await timelines on de-merger of JIO/Retail in the upcoming AGM; any material weakness in stock (weak results etc) is a good entry point.