Q3FY24 Review: Reliance Industries: Stronger than expected, as E&P surprises

23 Jan 2024 , 03:28 PM

RIL’s Q3FY24 PAT growth of 9% YoY was ahead of forecast, as E&P surprised when others were in line. Analysts of IIFL Capital Services maintain FY24-26 PAT growth of 6% p.a., and see an upside if commodity businesses show strength (50% share in Ebitda). There are signs of capex intensity subsiding and scope to improve asset turn in B2C segments; base case SoTP is upped to Rs2,792/share. Earnings Beat: RIL’s Q3FY24 PAT growth of 9% YoY beat forecast as E&P Ebitda growth of 50% YoY surprised, at a time when O2C/retail/Jio were up 1%/31%/11% YoY respectively. In case of O2C business, weak margins and shutdown weighed high on Ebitda. Surprise in E&P was on the back of production ramp-up (30mmscmd volumes); retail Ebitda grew faster than sales, as operating leverage kicked (40bps YoY higher core margins at 8.1%). New Commerce accounted for 19% share in sales; in case of Jio, the performance was in line and was entirely driven by subscriber growth. The sharp 27% YoY increase in depreciation was on account of E&P, while 11% YoY growth in interest mirrored macro trends. Share of B2B businesses in Q3 Ebitda was 47% vs 49% YoY/QoQ. 

New energy giga-factory start by CY24-end: 

During the earnings call, RIL’s CFO stated a bullish outlook on each of the businesses, with -1) the demand for MS, HSD and ATF is strong, while supply constrained, for which the cracks should remain firm; petrochemical profitability however is uncertain, as market is well supplied, with China recovery consistently delayed; domestic demand however is very strong led by Government spending; 2) gas prices could remain soft in sync with regional trends; 3) retail should focus on expansion with an eye to improve efficiency and profitability; 4) JIO AirFiber is now available in 4000+ cities/towns, with pan India coverage targeted by 1HCY24; 5) new energy business should start operations in phases by CY24; 6) capex has peaked, and benefits of the same should flow through. 

Maintain earnings; up SoTP: 

Analysts of IIFL Capital Services forecast RIL’s consolidated PAT to register 6% p.a. growth through FY26, led by: 1) Steady B2B business 2) 18% p.a. Ebitda growth in retail 3) 10% p.a. increase in ARPU for Jio. Base case SoTP is now Rs2,792/share, as Jio EV is upped. Listing of retail/Jio, steep tariff hikes in telecom, further clarity on the new energy business — are all key re-rating triggers for the stock from hereon.