Reliance Industries Q3 Review: Outlook Improving, Capex To Boost Earnings, Say Brokerages

Reliance Industries Ltd.'s third-quarter earnings were aided by oil-to-chemicals, digital, retail, and exploration and production businesses.

The company’s outlook is improving, and the massive capital expenditure lined up for the 5G rollout, retail and new energy businesses will provide an earnings boost in the coming quarters, according to analysts.

The Mukesh Ambani-led conglomerate’s consolidated profit rose 14.8% sequentially to Rs 17,806 crore in the quarter ended December, according to its exchange filing. That compares with the Rs 16,037-crore consensus estimate of analysts tracked by Bloomberg. It was aided higher operating margins.
 
RIL Q3 FY23 Highlights (QoQ) 

• Revenue from operations fell 5.26% to Rs 2,20,592 crore, against the estimated Rs 2,29,000 crore.   

• Operating profit or earnings before interest, taxes and depreciation rose 24% to Rs 35,247 crore, compared with the Rs 33,626-crore forecast.  

• Operating margin stood at 16.2% versus 12.4%, as of September.   

Here's what brokerages made of Reliance Q3 results:

JM Financials 

• Reiterated 'Buy' with unchanged target price of Rs 2,950 per share given RIL’s industry leading capabilities and expectation of 14-16% annualised growth in EPS over the next 3-5 years.

• RIL’s consolidated Q3 capex (excluding spectrum) continued to be higher at Rs 37,600 crore against Rs 32,500 crore in Q2.

• Reported net debt at Rs 1,10,200 crore, up Rs 16,900 crore sequentially due to capex towards 5G and retail ramp-up.

• Consolidated gross debt at Rs 3,03,500 crore vs Rs 2,94,900 crore at the end of Q2.

• While cash and cash equivalents at end-Q3FY23 is Rs 1,93,300 crore versus Rs 2,01,600 crore at end Q2FY23.

• Deferred spectrum liability was at Rs 1,15,200 crore.

Jefferies

• Refining drives earnings beat. Elevated capex in retail and Jio Ebitda have beaten estimates by 6% on 8% in O2C and 2% in Jio, with retail in line. 

• Retail revenue growth missed estimates, but strong store additions and improving footfalls paint a strong growth outlook for FY24.  

• Jio's subscriber addition was a tad lower, but rapid 5G rollout should drive strong growth.  

• O2C benefited from strong diesel spreads and cheap crude blending; Chinese demand recovery can lead to earnings upside in FY24.  

• Elevated capex in Jio, Retail: Nine-month capex at Rs 1.01 lakh crore was elevated, rising 47% year-on-year.

• Retail with around 19 million square feet floorspace and 11 million sq ft warehousing addition over nine months will see increase in capex year-on-year (FY22: Rs 30,000 crore).  

• Jio's capex will see a sharp jump as it rolls out its pan-India 5G network. FY24 number should be elevated, as new energy capex accelerates.  

• Forecasts 18% Ebitda growth in FY24 driven by 24% growth in Reliance Retail and 23% in Jio.  

• Possible earnings upside from O2C if China's demand recovers by mid-2023. Tariff hike in Jio, removal of export duties are other triggers. 

• Current stock price imputes little value to green energy.

•  Maintain 'Buy' with a price target at Rs 3,110, an upside potential of 27.3% over the last traded price of Rs 2443.

JPMorgan 

• Given RIL fell 5% versus 1% rise in Nifty in the the last one month, the Ebitda and profit beat would be seen as positive, with consolidated Ebitda at the second highest reported level.  

• O2C (refining, petrochem) and E&P should remain the key earnings drivers in 2023 as consumer business growth slows down. Jio was soft, digital services ex-Jio was strong. 

• Overweight on RIL; recent underperformance is mostly flows-driven (given continued FII selloff).

• Assume no tariff hike in FY24; see a healthy earnings environment for RIL, with the O2C, and E&P business benefitting from China reopening and higher volumes.

• JPMorgan's gross refining margins forecast is well below spot level; it has conservative E&P volume assumptions. 

• Do not see listings of the consumer business this year or any stake sale in the new energy business.  

• Investors have restarted the focus on RIL’s capex and rising debt. Expect overall spending levels to moderate as spectrum acquisition is behind and immediate spending on new energy is unlikely. 

• RIL’s consolidated dues and borrowing is up sharply over the last one year, mostly driven by the surge in deferred payment liabilities post the spectrum acquisition; underlying borrowings remain well below the Q4 FY20 peak.   

NUVAMA Securities

• Expect GRMs to stay lofty ($5-6/barrel) on strong middle distillate cracks, albeit below 2022.  

• Windfall tax will remain near-term earnings drag. Reiterate ‘Golden Era of Refining’ thesis, yielding more than $10 GRMs 2024 onwards.  

• Upstream to nearly match retail FY24 estimated Ebitda given steep gas prices and further KG-D6 ramp-up. 

• New energy (upgrade) plan towards green hydrogen shall re-rate valuation, besides huge synergies with existing O2C. 

• Retain ‘Buy’; target price unchanged at Rs 3,205 with an upside potential of 31% over the last traded price of Rs 2443.

• RIL’s new energy rollout shall unleash its next leg of growth, besides aiding conventional business (New energy upgrade). 

• Cut FY24 Ebitda estimate by 2% (weak near-term outlook). 

IIFL

• Business outlook: During the analyst call, RIL said the business outlook for each of the business segments is improving.

• The company noted that the O2C business should benefit from strong GRMs and rising petrochemical spreads as China opens up.

• The company also expects its gas production to rise 58% in H2FY24 to around 30 mmscmd at a time when the pricing outlook remains firm.

• In telecom, the focus is on fast-track 5G rollout and gaining market share.

• No specific timeline for a tariff hike was discussed.

• Retail should sustain ramp-ups in store additions. To date, approximately 19 million square feet of area have been added.

• Around 2,029 new retail stores with a focus on groceries were added, leading to a 65% YoY revenue growth in the segment.

• Massive capex underway: The capex on 5G rollout, retail, and E&P should remain firm in FY24.

• The brokerage has cut the FY23/24 consolidated EPS by 3-4% to reflect a 3-8% Ebitda cut in Jio due to deferment of the tariff hike, higher depreciation, etc.

• The 15% per annum PAT growth considers ramp up in E&P volumes and gradual pick up in revenue per sq ft in retail with unchanged margins.

• The stock will react positively to news flow on tariff hikes in telecom, the demerger of Jio Financial Services, and green energy businesses.