Q2FY24 Review: Reliance Industries: Retail ramping and capex peaking

30 Oct 2023 , 02:43 AM

RIL’s Q2FY24 PAT growth of 27% YoY was ahead of forecasts, on the back of O2C and Retail; Jio and E&P came in-line. OCF/Ebitda conversion was 173%, for which net debt was down 7% QoQ despite a capex of Rs785bn in H1. The 3% upgrade in FY24 EPS has an upside, if retail margins further expand and GRMs are stable. SoTP is Rs2,714/share, which builds in 10% p.a. of increase in Telecom ARPU >FY24. Valuations are attractive; BUY. As stated by RIL CFO, if the peaking of capex materialises, it can be a trigger for the stock. 

Retail and O2C surprise: 

RIL’s PAT in Q2FY24 was up by 27% YoY, ahead of forecasts. Jio and E&P performed in line, O2C and Retail came in ahead. As per RIL, in O2C, the benefits of fuel sourcing + 85% YoY lower windfall tax (US$0.5/bbl of crude throughput) offset weakness in the Petrochem segment, driving 36% YoY growth in Ebitda. The YoY growth of 50% in E&P Ebitda was due to 6% higher realisation and 49% higher volumes; Retail’s 32% YoY Ebitda growth was backed by store-count increase (471) and higher margins (8.1% vs 7.4% YoY). JIO’s 14% YoY in-line Ebitda growth was mainly because of subscriber additions and SUC reduction. The sharp 29% uptick in depreciation was driven by B2C segments, while 26% higher interest was a fallout of rising rates and FX losses. For H1, capex was Rs785bn, funded through internal cashflows as net debt was down 7% QoQ; the OCF-to-Ebitda conversion was 173%, since RIL squeezed working capital in H1FY24. 

Expecting capex to peak in FY24: 

During the analyst call, RIL CFO shared bullish outlook on each of the business segments with: 1) O2C benefiting from the above-cycle GRMs, at a time when petchem spreads are bottoming. 2) Ramp-up in E&P production underway. 3) Fast-track completion of 5G network and concomitant subscriber gains; no comments were offered on 4G tariff hike. 4) Ramp-up in retail, as store count gathers momentum and operating leverage kicks in. 5) Capex expected to peak in FY24 as 5G rollout is nearly complete. RIL is silent on its green energy initiative. Also, no details were shared on the recently concluded INVIT for warehousing assets. 

Attractive valuations: 

In the base case, analysts of IIFL Capital Services model RIL’s FY24-26 consolidated PAT growth of 6%, based on: 1) Flat O2C, E&P. 2) 10% p.a. growth in Jio ARPU. 3) Ramp-up in the Retail business. Analysts of IIFL Capital Services see upside risks to the forecasts from sharper-than-expected margin expansion at retail and above-normal GRMs; base case SoTP is Rs2,714/share; BUY.