Reliance Industries Rating: Buy – Building the next engine of growth

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We delve deep into Reliance Industries (RIL)’s FY22 Annual Report, underscoring the key initiatives and business outlooks for its various segments. The key highlights of our analysis are:

The report showed RIL’s FY22 belonged to the O2C (order to cash) segment performance that outpaced other segments, even as RJio retained its market share. Retail business saw a steady recovery. The high crude prices led to 56% y-o-y Ebitda growth in O2C business while Retail grew 28% y-o-y; RJio growth, however, decelerated to 22% y-o-y. Post-equity raise during the last couple of years, FY22 saw a strong capex with heavy investments, especially in RJio, which included a large-scale spectrum investment. Retail witnessed aggressive footprint additions, while new energy reported aggressive acquisitions. The growth momentum and improved margin profile across the sector will drive RIL’s revenue/Ebitda growth of 25%/32% in FY23E, respectively. Over the next two-to-three years, RIL is likely to create the next engine of growth but it could put pressure on its near-term return ratios.

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Retail benefitting from Covid-19 recovery and store additionsReliance Retail clocked a robust growth of 29%/28% y-o-y in standalone revenue/Ebitda, propelled by recovery in footfalls as well as footprint additions. Core Ebitda too rose 35% y-o-y, though merely 6% over pre-Covid levels, as resumption in business included incremental costs.

Store additions (of 2,485) remained strong and the continued focus on online segment too reaped benefits.

O2C segment benefiting from higher crude pricesRIL restructured its Refining and Petrochemical segments into the O2C segment to attract strategic partnerships. Demand improved in FY22 y-o-y (on a lower base), which led to expanded margins in refined products. Gasoline margin improved sharply .

Opening up of the economy and removal of travel restrictions would enable demand to pick-up faster than expected. SG GRM to remain high at an average of ~$18/bbl in FY23, as demand continues to outweigh supply. Management believes that low Chinese exports and peak maintenance season will support product margins going forward.

Capex and debtRIL’s total capex stood at Rs 970 bn, primarily for the Digital, Retail, and O2C businesses along with the forex impact, while capitalised capex stood at Rs 1.5t primarily due to RJio.

Valuation and viewThe crude price improvement continues to prop up strong growth momentum in FY23. We expect consolidated revenue and Ebitda to clock 15% CAGR each over FY22-FY24, which do not factor in any incremental growth from 5G capex, new energy and other segments. These could create the next engine of growth over the next two-to-three years as each of retail, telecom and new energy is seeing notable technological advancement with ambitious growth targets. However, this has the potential to dent the existing single-digit return ratios. We reiterate our BUY rating on RIL with a TP of Rs 2,880.