Reliance Industries rating – Buy: Weak O2C behind miss on earnings

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Refining margins remain weak, but petchem is seeing a recovery.

RIL’s Q3 consolidated Ebitda (+14% q-q, -5% y-y) was 3% below our/ consensus estimates. The miss was largely on energy business with standalone Ebitda (+14% q-q, -33% y-y) 12% below our estimates. RIL has reorganised its reporting to combine the refining and petchem segments as a single O2C (oil to chemicals) segment.

With the changed reporting, it has not disclosed refining GRM, which makes quarterly comparisons difficult. Petchem was further strong q-q (polymer margins were record high, intermediate volume/margins also better); thus, we believe that refining was likely weaker vs our GRM forecast of $6/bbl ($5.7/bbl in Q2).

Despite carving out of the fuel retail business and a weak environment (footfalls at 75% of pre-COVID-19, flat y-y), retail Ebitda (+53% q-q, 13% y-y) was 15% ahead of our estimate. But, adjusted for Rs 7.8 bn investment income, retail Ebitda was up 15% q-q and 14% below our estimates. In Jio, subs addition was muted (gross 25 mn, but net 5 mn), but due to higher blended ARPU of Rs 151 (vs Rs 145 in Q2), Jio Ebitda (+8% q-q, 45% y-y) was 1% above us.

Pandemic still impacting key segments
Refining margins remain weak, but petchem is seeing a recovery. As the economy further opens up, volume growth should get stronger in retail. In Jio, subscriber growth should pick up for mobile and broadband. But tariff hike is overdue and is a potential catalyst, in our view.

Outperformance likely to sustain
We cut FY21F Ebitda 14% on weak operating earnings, but with higher interest income/lower tax, our forecast EPS rises 25% in FY21F & 5-9% in FY22/23F. After down 9% in FY21F, we expect Ebitda to grow 62% in FY22F (low base, volume/margins recovery, Jio tariff hikes), and 28% in FY23F. We expect 33% earnings CAGR over FY20 to FY23F.

We continue to value RIL on SOTP basis with unchanged EV/Ebitda multiples (refining 7x, petchem 8x, Jio 11x, core retail at 30x, non-core at 7x). We value Future’s retail business at Rs 100 (unchanged), and adjust our TP for recent stake sales in Retail. Our revised TP of Rs 2,400 implies 17% upside. RIL has outperformed NIFTY for the past six years, and with strong growth the outperformance will likely sustain. Reiterate Buy.

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