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Equity Research Report: Reliance Industries Ltd (RIL)

RIL may scale 2866 by June’23, 3392 by Mar’24, 4017-4758 by Mar’25 amid expected robust O2C, retail, telecom/digital and Oil & gas (E&P) business

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Company Overview:

Reliance Industries Ltd (RIL) is an Indian MNC conglomerate and the largest private sector company in India. RIL has diverse businesses from data to oil including energy, petrochemicals, natural gas, EV/RE (solar & hydrogen), retail, digital services, telecommunications, electronic media/TV channels, and textiles. Reliance is one of the most profitable companies and also the largest publicly traded company by market capitalization, revenue, tax payment, and employment generation in India. RIL is also India's largest merchandise exporter, having around 7% share with access to foreign markets in over 100 countries. RIL alone contributes almost 5% of GOI’s total revenue from customs & excise duties. RIL is also the highest income/corporate taxpayer for the private sector in India.

Business Model:

RIL is a diversified corporate organized mainly 6 areas of activity: Refining of petroleum and various downstream products (O2C- Oil to Chemical-almost 60% of total revenue is the bread & butter/cash cow) - liquefied petroleum gas, propylene, naphtha, gasoline, kerosene, etc. RIL also produces petrochemicals (polyethylene, polypropylene, polyvinyl chloride, polyester, purified terephthalic acid, paraxylene, ethylene, olefins, benzene, butadiene, acrylonitrile, and caustic soda).

The O2C business of RIL captures a broad portfolio spanning transportation fuels, polymers, polyesters, and elastomers. The deep and unique integration of the O2C business includes world-class assets comprising ROGC, Aromatics, Gasification, multi-feed, and gas crackers along with downstream manufacturing facilities, logistics, and supply chain infrastructure.

Specifically, Reliance O2C entity includes refining and petrochemicals plants and manufacturing assets located at Jamnagar, Hazira, Dahej, Nagothane, Vadodara, Patalganga, Silvassa, Barabanki, and Hoshiarpur. It also includes a 51% equity interest in fuel retailing JV with BP – Reliance BP Mobility Limited (RBML) and 74.9% in Reliance Sibur Elastomers Private Limited. RIL is one of the largest integrated polyester players globally having 10 manufacturing facilities in India and 3 in Malaysia.

RIL also involves in the retail & distribution business (B2C and B2B) of consumer products (almost 25% of total revenue): distribution of food products, clothing, and accessories, consumer electronics, etc. through a vast network of brick & mortar stores in India.

RIL is also engaged in telecommunication/digital services (R-Jio-almost 10% of total revenue); exploration and production (E&P) of crude oil and natural gas (around 2% of total revenue); media business (around 1% of total revenue) and others (financial services; textile manufacturing, etc.). Almost 60% of revenue comes from India, while 40% is generated from exports, mainly petroleum/diesel/gasoline, and refined products, especially to diesel-starved Europe since last year (after Europe banned Russian refined products amid the Ukraine war).

RIL has the world’s biggest oil refining complex at Jamnagar (1.24 mbpd) and can export almost 80% of the output after the Russia-Ukraine war broke out back in late Feb’22. Before that, RIL was able to utilize only around 75% of its capacity. RIL has also better refining efficiency and generally processes high Sulphur density crude oil from Russia, Saudi Arabia, and other cheaper sources and sells it at a higher grade, resulting in a higher margin (GRM).

RIL has significant flexibility in terms of crude feedstock ratio and yield shifts. Surging diesel prices in Europe after it bans Russian oil and various big Asian/Chinese refineries including RIL are big beneficiaries as they bought cheap Russian crude oil ($25-30 discount from global market prices) and sold the same after refining to Europe at higher prices.

Overall, oil, metals/steel is a big beneficiary of Russia-Ukraine geopolitical tensions and subsequent economic sanctions on Russia, a key producer of commodities. Anyway, to control domestic prices/inflation, the Indian government slapped a windfall tax (export duty) on Indian oil refiners and steel producers. Subsequently, an export levy of Rs.13/liter on diesel and Rs.6/liter on ATF was imposed on 1^st July’22. The Modi admin also imposed windfall taxes on domestic producers of crude oil (like ONGC) as it was also benefiting from abnormally high global prices. As a result, RIL scrip tumbled from a record high of around 2861 in early July to 2896 in late September’22.

Before COVID, RIL’s GRM was around $8-10. In Q4FY22 (March 22), RIL’s GRM surged to $15.1 from $5.1 a year ago. Before the Russia-Ukraine war, RIL’s export-savvy O2C business suffered significantly in FY21 due to COVID lockdown/restrictions in Europe. But the overall impact of a windfall tax on RIL was limited because of the exemption of its Jamnagar refineries to some extent for EOU status (Export Oriented Unit).

Also, the Indian government withdrew the export tax on Petrol and reduced the same for diesel and ATF export in mid-July’22 in line with falling prices of crude oil globally. But overall, the spread for refined petro products also slumped by almost 50%. After revision in mid-Feb’23, the export duty of diesel was 2.50/lt in line with the fall in global oil prices amid the concern of synchronized global recession, especially on both sides of the Atlantic (U.S.-Europe on growing banking crisis). Like steel, falling oil prices are also negative for overall spreads/realizations/GRM of oil refineries like RIL and vice-versa.

Business Competitors: Apart from retail business, RIL has limited competition even in telecom

In India, RIL’s export-oriented O2C business’ main competitor is Russian Rosneft-backed Nayara Energy (unlisted and small compared to RIL). Also, other competitors are IOL, VEDL, MRPL, and ONGC to some extent (limited completion in O2C business). In consumer-facing business, RIL has various big retail brands and competitors in textiles/dress materials, store & service concepts (including FMCG, food/agri, and pharma products), and also various digital services. In telecom, R-JIO now has only one viable competitor (Bharti Airtel). In EV/RE business, RIL also has limited competitors (Adani and a few others).

Key management: RIL

Board Members: RIL

Key Shareholders: RIL (Promoter: Ambani family led by Mukesh Ambani)

Highlights of Q3FY23 report card: RIL (Consolidated-INR 100 Cr. =1B)

·         Operating revenue INR 2205.92B vs 2328.63B sequentially (-5.27%) and 1615.65B yearly (+15.33%)

·         Yearly growth in revenue amid upbeat digital service and retail segment coupled with a higher realization for O2C (oil to chemical refining) and jump in oil & gas exploration business

·         Operating expense INR 1852.45B vs 2016.39B sequentially (-8.08%) and 289.39B yearly (+14.72%)

·         EBITDA INR 352.47B vs 312.24B sequentially (+12.88%) and 297.06B yearly (+18.65%)

·         Higher EBITDA due to strong growth in digital business, higher ARPU, robust growth across various consumption baskets in retail and addition of new stores, jump in online sales, improvement in middle distillate cracks despite weak downstream chemical margins and higher SAED (export duty/windfall tax) related costs in O2C

·         Net interest paid INR 52.01B vs 45.54B sequentially (+14.21%) and 12.83B yearly (+36.44%)

·         Higher interest due to higher borrowing costs (rising bank rates and bond yields) and higher debt

·         O/S (gross) debt Rs.3035.30B vs 2948.59B against cash & cash equivalents Rs.1932.82B vs 2016.06B sequentially

·         Higher debt primarily to fund 5G and retail expansion CAPEX

·         Core operating profit (EBTDA=EBITDA-INTT) INR 300.46B vs 266.70B sequentially (+12.66%) and 258.94B (+16.03%)

·         Core operating EPS (EBTDA/Share) INR 44.41 vs 39.42 sequentially (+12.66%) and 38.28 yearly (+16.02%)

·         EBITDA margin 15.98% vs 13.41% sequentially (+257 bps) and 15.53% yearly (+45 bps)

·         EBTDA margin 13.62% vs 11.45% sequentially (+217 bps) and 13.54% yearly (+8 bps)

·         Interest/EBITDA 14.76% vs 14.58% sequentially (+17 bps) and 12.83% yearly (+192 bps)

·         Higher tax payments due to lower available tax credits and incentives

·         Reported CAPEX Rs.375.99B

·         Marinating conservative balance sheet while executing accelerated growth plans (sustainable expansion & diversification)

·         Higher USDINR and also Fed hikes contributed to higher financial cost

·         Trying to optimize loan mix in USD and INR to minimize the impact of higher interest/borrowing cost

·         Overall mix performance

Highlights of the investor presentation, management commentaries, and Q&A (analyst concall): Q3FY23-RIL

JIO Platforms Ltd (JPL)

·         Higher revenue +20.9% (y/y) due to steady increases in subscriber base and ARPU for the connectivity business

·         Higher EBITDA +25.1% (y/y) due to higher revenue and margin/ARPU

·         Lower finance cost -16.7% (y/y) due to the repayment of high-cost deferred payment liabilities

·         Customer base 432.9M vs 427.6M sequentially and 421.0M yearly

·         ARPU Rs.178.2 vs 177.2 sequentially and 151.60 yearly amid a better subscriber mix

·         Rolling out 5G services (True5G) across 134 cities in 22 states and UTs

·         Providing Software Defined Wide Area Network (SD-WAN) for IOCL to power IOC’s retail and critical business automation

·         Also providing cutting edge power & play cloud solutions for SMEs

·         A channel for faster rollout in small to mid-sized towns with lower build-out and customer acquisition costs by leveraging partners

·         Low OPEX substitute of the high OPEX air-conditioned data centers

·         5G rollout and FTTH (fixed line broadband) momentum to accelerate share gains in 2023

·         Market share in overall broadband is well over 50%

Reliance Retail:

·         Higher revenue +18.6% (y/y) due to rebound of festival season consumer spending after two years of COVID disruptions

·         Higher EBITDA +24.9% (y/y) due to higher volume and higher margin amid favorable mix, operating leverage, and efficiencies

·         Higher finance cost +255% (y/y) due to higher interest rate/borrowing costs and higher debit/loan balances

·         Stores 17225 vs 16617 sequentially and 14412 yearly

·         Registered customers 235M vs 221M sequentially and 180M yearly

·         Consumer Electronics business excluding devices witnessed 45% revenue growth (y/y) driven by higher footfalls and bill values during the quarter

·         Wider assortment, new launches, attractive offers, and financing schemes in particular drove customers to shop at stores and digital platforms

·         The business saw double-digit growth across categories of Phones, TVs, and Appliances

·         Fashion & Lifestyle delivered revenue growth of 13% (y/y) led by festivals and the wedding season

·         The grocery business delivered robust revenue growth of 65% (y/y) led by broad-based growth in categories of Fruits & Vegetables, Staples, General merchandise, Packaged food, and HPC

·         The Grocery Digital Commerce business saw steady revenue growth driven by festive demand and the expansion of MilkBasket in new cities

·         Grocery New Commerce revenue growth was driven by new merchant onboarding and efficient supply chain management which resulted in superior delivery capabilities for merchant partners

·         The Pharma business saw revenue growth of 93% (y/y) led by growth across all channels

·         During the period, consumer brands business launched several new variants in processed foods, beverages, spices, and staples. Acquisition of Sosyo, Lotus Chocolate, and the launch of the Independence brand would further strengthen the portfolio of the business; the recently launched Campa-Cola

O2C (Oil to Chemicals) business:

·         Revenue increased +10% (y/y) due to higher spread/realization as crude oil jumped by almost +10%

·         But revenue was also undercut by lower throughput (refining/production) amid planned maintenance shutdown and inspection activity

·         The export increase was led by higher price realizations (especially in Europe) despite lower downstream product volumes

·         Growth in EBITDA was supported by strength in middle distillate cracks. This was however; partially offset by weak margins across polymer, polyester chain, and light distillates products. Continued SAED on transportation fuels also impacted earnings significantly

·         Total Throughput/refinery production 18.8 MMT vs 18.6 MMT sequentially and 19.7 yearly

·         Production meant for sale (after adjusting captive consumption) 16.2 MMT vs 16.2 sequentially and  17.6 MMT yearly

·         Production meant for sale was lower on a Y/Y basis due to planned Maintenance and Inspection turnaround

·         Gasoil exports were optimized to improve netbacks with regional arbitrage opportunities

·         Given the high energy price environment, gasifier operations were optimized along with increased use of internal fuels to eliminate LNG imports

·         Global oil demand declined by -0.4 mbpd (y/y) to 100.5 mbpd as slower demand from OECD countries outweighed resilient demand from the Middle East, Africa, and Asia (Ex-China)

·         Capacity outages due to seasonal maintenance and industrial action in France resulted in lower oil demand

·         Demand for gasoil remained strong offsetting the weakness in gasoline demand

·         Crude oil benchmarks rose (y/y) due to aggressive production cuts announced by OPEC+, limited spare capacity (constrained production), EU sanctions, and the G7 price cap on Russian oil exports

·         Global refinery throughput was higher by +1.0 mbpd (y/y) and rose by +0.6 mbpd (q/q) at 81.4 mbpd

·         Domestic demand for HSD, MS & ATF increased by 10.2%, 7.7% and 23.5% respectively (y/y)

·         The government of India continued with SAED on exports of transportation fuels which are being reviewed every fortnight depending upon cracks in the international market

·         India’s polymer and polyester demand improved by 8% and 11% respectively (y/y)

·         Polymer demand growth was led by agriculture, infrastructure, health & hygiene, consumer durables, and automotive, and Polyester demand was supported by higher cotton prices and increased demand for the beverage segment

·         Oil demand is estimated to average 101.7 mbpd in CY23, up +1.9 mbpd (y/y) supported by opening of Chinese economy in H1CY23

·         Middle Distillate cracks to remain firm on lower inventories, seasonal demand, and the impending loss of Russian oil products

·         Petrochemical feedstock price volatility is likely to continue amidst uncertain geopolitical situations, and recessionary trends in developed economies i.e., high inflation coupled with a high-interest rate in USA & EU market

·         Polyester demand is expected to improve with the upcoming wedding season in the domestic market and the shift in China’s Zero COVID policy

·         Economic headwinds due to rising interest rates and contracting PMIs pose a downside risk to oil demand growth

Jio-BP update

·         Reliance BP Mobility Limited (operating under the brand Jio-BP) has continued servicing customers across the 1,525-strong country-wide networks, supporting channel partners through pan-India marketing campaigns and investing in industry-leading customer value propositions despite the difficult operating environment

·         Riding the wave of the energy transition, Jio-BP is working on twin goals of consolidating its CNG presence and rapidly expanding the EV charging network. With 555+ live charging points and 1,18,000+ swap sessions to date alongside expedited construction of over two dozen fleet hubs, Jio-BP continues to sustain the growth momentum in EV charging. Continuing engagement with OEM partners, Jio-BP setting up fast charging stations for Citroen dealers across 15 cities to support their e-SUVs

E&P-OIL AND GAS (EXPLORATION & PRODUCTION)

·         Revenue increased by +74.8% (y/y) was led by improved gas price realization and higher production (+6.1%) in the KGD6 block

·         The average gas price realized for KGD6 was at $ 11.3/MMBTU vs $ 6.1/MMBTU (y/y), with the rising of the gas price ceiling to ~ $12.46/MMBTU by the Government of India

·         EBITDA increased by +90.9% (y/y); EBITDA margin was at 86.7%

·         Geopolitical uncertainty and constrained supply likely to keep gas prices firm in the near term

·         Incremental production and higher prices will support EBITDA Growth in the near term

Media Business:

·         Consolidated revenue rose +11.6% (y/y) primarily driven by the movies and sports business amidst a challenging advertising environment

·         The continued softness in the macro-economic environment dampened the advertising demand and ad revenue of all our segments was down on a y/y basis

·         Despite inflation showing signs of easing, economic sentiment remained weak during the quarter

·         Core categories continued to spend on advertising, but driving growth was challenging due to restrained spending by brands across categories and a sharp pull-back by start-ups and e-com players

·         EBITDA declined sharply (-86.7%) on a y/y basis with the drop-in advertising revenue directly impacting margins as investments in content continued with a view to consolidating operating metrics

·         The profitability of the business also suffered due to investments in new initiatives, digital entertainment, and sports, which had a negative contribution of around Rs.1.40B to EBITDA

·         Finance cost was higher due to the increased borrowing at Viacom18 during the year

·         TV News network continued to be the leader in Hindi (News18 India) and English (CNN News18) for the second consecutive quarter

·         CNBC TV18 maintained the status quo of undisputed leadership in the English business news segment

·         Leadership in 3 Hindi regional markets of Rajasthan, Bihar/Jharkhand, and MP/Chhattisgarh made News18 the dominant news brand in the Hindi-speaking universe

·         In the Entertainment segment, our TV network had a 10.5% viewership share

·         Colors recorded its highest viewership share in 5 years, mounting a strong challenge for a leadership position

·         Viacom18 took a major step towards scaling its digital business with FIFA World Cup 2022 as digital reach for a marquee sports event crossed TV reach for the first time in India. More than 110M users tuned in on the digital platform to watch the sporting spectacle, made possible by leveraging the reach of the digital platform. The grand finale witnessed a peak concurrency of 12.1M, the highest for a non-cricket sports event in India

·         Network18’s Digital news portfolio was India’s second most popular destination for news, reaching more than 40% of India’s internet population. News18’s regional portfolio rose to leadership while Moneycontrol and News18 India continued to be amongst the top platforms in their genres, ranking high on engagement metrics

·         Viacom18 continued to expand its sports portfolio

·         Viacom18 has been scaling up the digital vertical and building a new-age digital platform

·         With IPL coming up, for which Viacom18 has exclusive digital rights, ramping up the digital platform has been a key focus area

·         FIFA was the first major sports property on the network and a stepping-stone in this development phase. We are investing to drive digital user acquisition and engagement with technological innovations

·         The operating performance of the media businesses was strong, however, the tough macro-economic environment made it challenging from the perspective of financial performance

·         Inflation has been showing signs of cooling off, but the revival of consumer demand remains crucial for growth in the media business

·         Our strong positions across media verticals put us in a pole position to grow once the macroeconomic environment normalizes

Other Business:

·         Reliance Strategic Business Ventures Limited, a wholly-owned subsidiary of Reliance Industries Limited acquired a 23.3% stake in Exyn Technologies Inc. (Exyn) for a total consideration of US$25 million. Exyn is pioneering multi-platform robotic autonomy for complex, GPS-denied environments. It is one of the leading autonomy technology companies, which enables drones/robots to navigate difficult terrains without GPS or other navigation technologies

·         During the quarter, Reliance Projects & Property Management Services Limited, a wholly-owned subsidiary of Reliance Industries Limited, acquired  Reliance Infratel Limited for a total cash consideration of Rs.37.25B (as per NCLT resolution)

Comments by Mukesh Ambani (RIL Chairman and MD):

“Our teams across businesses have done an excellent job in delivering strong operating performance through a challenging environment. All segments contributed to the robust growth in consolidated EBITDA on a Y-o-Y basis.

In the O2C business, middle distillate product fundamentals remain strong with firm demand, constrained supply, and high natural gas prices in Europe. Downstream chemical products witnessed margin pressure with excess supply and relatively weak regional demand. Our focus remains on operating safely and reliably producing vital fuel and materials for consumers.

Jio delivered record revenues and EBITDA driven by strong momentum in customer growth and data consumption. This quarter we launched True 5G services. It is now available in 134 cities and towns in India, enhancing the customer experience while enabling next-generation services. It is heartening that customers recognize the great value and world-class connectivity that Jio offers on its 4G and 5G networks.

The retail business had another quarter of strong progress with more Indians choosing to shop at Reliance Retail stores. We are focused on delivering superior products and value to customers while improving profitability.

Our upstream business delivered robust growth with sustained production from the KG D6 block along with a higher realization. We are on track to reach 30 MMSCMD of gas production in FY 24 after the commissioning of the MJ field. This will significantly enhance India’s energy security in a volatile energy market environment.

We are making rapid progress toward the implementation of new energy Giga factories at Jamnagar as part of our commitment to revolutionizing the green energy sector.

Our strong balance sheet and robust cash flows remain the cornerstone of our commitment to growing existing businesses as well as investing in new opportunities.”

RIL-Fair Valuations: Around Rs. 2866-3392-4017-4758 (FY24-26); current fair value around Rs.2373

In FY22, RIL reported the core operating EPS at 141.72 vs 92.39 in FY21 (impacted by COVID) and 104.42 in FY20 (pre-COVID). RIL was a story of a ‘K’-shaped economic downturn during COVID due to a global/domestic lockdown; its O2C business was severely affected along with consumer-facing/contact-sensitive other businesses (like Retail). Only digital business (R-JIO) was a beneficiary of COVID-related disruptions.

Now looking ahead, considering the current quarterly run rate, previous trends, and various commentaries by the company/management, higher refining margin, higher digital/telecom ARPU, higher borrowing costs, and partial effect of a windfall tax, the FY23 core operating EPS should come around 180.70 at projected 28% growth. Thereafter RIL may report around +20% CAGR in core operating EPS for FY24-26. Similarly, if we consider BVPS (at around 20% CAGR), and OCFS (at around 15% CAGR) and assume fair average PE of 15 (EPS), P/B of 2, and P/OCFS of 15, the average fair value (EPS+BVPS+OCFS) may be around Rs. 2866-3392-4017-4758 (FY24-26); current fair value around Rs.2373. As the financial market generally discounts 1Y earnings/EPS in advance, RIL may scale 2866 by June’23, 3392 by Mar’24, and 4017-4758 by Mar’25.

C/F Analysis: RIL (consolidated)-YLY

Conclusions:

For FY24, RIL’s earnings may be boosted by higher refining margin, removal of windfall tax/export duty (as oil falls below the Russia-Ukraine war level), expected higher price of oil/spreads amid Chinese reopening and constrained supply, and upbeat digital & retail business. RIL is now actually incubating various consumer-facing businesses along with green energy, thanks to prudent CAPEX/investment. We may see potentially higher core operating EPS from FY24-26 onwards.

RIL reported negative FCF (Free Cash Flow) in FY19 and FY21 due to elevated oil/O2C and telecom/digital/retail capex. Although RIL has positive cash flow in FY22 as it has completed the previous capex cycle in FY21, going forward the market is concerned about negative FCF in FY23-25 due to the proposed Rs.75B green capex along incremental with retail/digital/telecom capex. For RIL, consistently higher capex due to the expansion of existing business and diversification into a new business is resulting in lower ROCE (return of capital employed) and ROE (Return on Equity).

The market was expecting a much lower initial green capex from RIL due to the poor visibility of the green economy in the next few years for a country like India. Also, RIL’s emphasis on 5G capex despite the uncertain outlook in India may be another factor that disappointed the market. Overall, the long gestation period nature of RE and telecom (5G) business and depressed FCF may keep RIL’s gross debt at elevated and ROCE/ROE at muted levels in the coming years amid falling EBITDA margin for its cash-cow patrochem business. But that perception is now fast-changing as the world is now moving towards a green economy and 5G narrative.

For Mukesh Ambani, data is like new oil (unlimited); petchem profit was the main support for cash-burning telecom and retail business. But when petchem/O2C cash flow slows, it is bound to affect other startup ventures (RE, digital, and retail). But now both retail and digital/telecom businesses now generating positive EBITDA/cash flow and RIL may also deleverage by listing the same in the coming days.

In the last decade, RIL generated consistently negative FCF due to its huge capex for its refinery/oil and telecom business. RIL was virtually a debt-free company (on a net basis) till a few years ago, but over the last few years, it has had to take huge debt to support its telecom (Jio) dream and oil capex (to support efficacy/refining margin and expansion/diversification).

Raising debt or equity was never a problem for a company like RIL, because of the market trust in its management/Chairman Mukesh Dhirubhai Ambani (MDA). But, as a visionary and debt-shy entrepreneur, MDA knows very well when to sell out the stake of a profitable business to slash huge debt (unlike his younger brother ADA), especially when borrowing cost is elevated.

In 2020, just after the COVID lockdown started locally and globally, RIL deleveraged at a record pace for its digital (Jio) business, taking the advantage of COVID theme, when the world runs on data, not oil. MDA was also able to sell a part of his retail business. RIL also divested a significant part of its Jio network assets (telecom Tower) to Brookfield.

RIL also entered a JV with BP for 49% of its Petroleum (fuel-marketing) business for $1B. Before COVID, the market cheered the RIL-Saudi Aramco MOU, which was likely to be converted into a $15B deal (20% stake including 51% stake of petroleum JV). Saudi-Aramco valued RIL at $75B enterprise value, which may be far higher than the fair market valuation at that time. But the deal with Saudi Aramco didn’t go through later due to the subdued prospect of the fossil fuel industry amid the global transition to green energy rhetoric. Again, after the Russia-Ukraine war, oil shoots up as there is not enough spare capacity amid muted oil capex. The narrative of the green transition may be too fast without an alternative arrangement. The world is again turning back to fossil fuels.

Overall for RIL, it’s the story of deleveraging and thrusting into a new business model as per evolving economic scenario. RIL’s digital and even retail business (essential/grocery items) was also a part of the K-Shaped economic boom after COVID. RIL will now gradually transform itself from a fossil fuel (oil) heavy business to green fuel (RE) along with digital and retail (consumer business). Visionary MDA knows that the days of oil (fossil fuel) supremacy are over and the world will now gradually shift to green energy. The transition is rapidly happening in AEs (U.S./Europe) including China, and India is bound to follow.

The transition from black to green energy will also act as a huge infra/green stimulus to set up an affordable green energy ecosystem (like EV, charging stations, EV batteries, solar batteries, etc). Also, incrementally higher green capex and lower oil capex may result in a demand/supply mismatch in the coming years and oil may jump further due to lower production, positive for RIL’s O2C business margin (higher spread/realizations). After the Russian invasion of Ukraine, the oil refining business is also turning out a major boost for RIL as India/RIL can buy Russian crude oil at a relatively cheaper price and sell the refined product at higher prices to Europe without inviting any US sanctions. India, now under the political leadership of PM Modi, can maintain good relations with both Russia and America, keeping its own interests at the forefront.

Looking ahead, RIL may hive off (monetize) parts of its oils-to-chemicals (O2C) division to make it easier to induct investors and unlock value after it scrapped a plan to sell a $15B stake in the business to Saudi Aramco. As the first step of the new strategy, RIL decided to transfer the company’s gasification assets to a wholly-owned subsidiary around late Oct’21. RIL is looking at the elements of the O2C business in light of its net carbon zero goals and may also hive off more such businesses.

RIL is investing Rs.75B (around $10B) over the next three years in green energy initiatives, including the Dhirubhai Ambani Green Energy Giga Complex in Jamnagar, as the refining and petchem major shifts its focus from hydrocarbons to renewable power. RIL has set itself a target to become a net-zero carbon company by 2035.

RIL invested $4B in setting up 10 synthetic gasifiers in 2012 to convert petcoke, one of the dirtiest refinery by-products, into gas to meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 MT a year, as generated from two of its cokers. The technology for petcoke gasification, RIL said in 2012 would help it produce 23 mscmd (million standard cubic meters a day) of syngas and will aid in reducing R-LNG (regasified-liquefied natural gas) intake for its refineries. The project, however, saw a three-year delay by when the LNG prices moderated. RIL said it seeks to attract strategic investors for the gasification and new materials/chemical projects.

RIL’s move to separate its petcoke gasifier assets is another step toward monetizing the potential synergies between its existing energy infrastructure and new energy plans. While investors have been skeptical about returns on the petcoke gasifier business for the past five years, the environment of high global gas prices, the gasifier’s ability to produce hydrogen, which can be converted into blue hydrogen (using carbon capture), and gasifier output of syngas (valuable in producing higher value add chemicals)—all now make it a highly profitable investment after multiple years of challenges.

Looking ahead, apart from the demerger/restructuring, and green energy move, RIL may also hike tariffs for the telecom business and expand/diversify in the retail business. Also, higher USDINR will be positive for INR as almost 40% of its revenue comes from export. The O2C business contributes almost 62% of its revenue followed by retail (around 27%) and digital business (around 3%) on average.

RIL has the world’s biggest oil refinery complex in Jamnagar (Gujrat) and it’s a major beneficiary of the protracted geopolitical conflict/proxy war between Russia and the U.S./NATO over Ukraine. Russia has no choice but to sell its oil at discounted prices to India and China for the sake of revenue and the economy. RIL operated its refinery at around 92% in April’22 against IOC’s 108% to cater to elevated diesel demand from Europe. Many European refineries had stopped Russian crude oil due to G7 and also self-imposed sanctions for the Ukraine invasion.

In any way, SGX GRM plunged from the peak of $30.5 to almost $3.90 in Q2FY23 on the concern of a synchronized global recession. But Chinese COVID reopening and cheap Russian crude oil are also supporting the GRM. RIL’s refinery processes a higher proportion of diesel and thus generally RIL GRM comes higher than SGX GRM. Every $1 increase in RIL GRM may translate to around $500M of EBITDA for RIL. Thus even after assuming normalization in the coming days, RIL’s GRM for FY23/24 may come to around $12 instead of the $10.5 earlier estimated.

The trajectory of GRM will be also dependent to some extent on the trajectory of the Russia-U.S./NATO proxy war over Ukraine. And till now there is no sign of any peace between Russia and Ukraine as the latter is not ready to sign any truce/ceasefire agreement instead of territorial integrity and sovereignty. Also, U.S./NATO will not withdraw various economic sanctions on Russia in a hurry even if there is some kind of ceasefire agreement. Thus GRM is likely to be elevated at least till Q2FY24 and this will boost refining profit for RIL further. And China’s reopening may also help higher GRN and petchem margins.

In 2022, despite tight inventory, diesel cracks corrected from $36 to $12, while Jet/ATF cracks also corrected from $28 to $13 mainly due to the Chinese lockdown and slowdown in fuel utilization. Global petchem margin was at a multi-year low due to lower prices of PE, PP, and PET amid subdued demand from China despite a recent surge in Naphtha (feedstock) prices. For RIL, the impact was lower due to its integrated operations –it captures the Naphtha spreads. But as RIL is also the largest buyer of its gas (NG), the overall standalone EBITDA margin falls to some extent.

For RIL, the expected recovery in the O2C/petchem business along with ongoing/rapid expansion of retail (including pharma, and grocery) and higher realization/strong growth in JIO may ensure around 25-28% growth in core operating EPS in FY23, followed by at least 20% CAGR in subsequent years. Reliance is now fast replacing (rebranding) closed (defaulted) ‘Big Bazar’ mall/shopping space with ‘Reliance/Smart Bazar’ across the country (almost 950 stores at various prime locations).

Thus oil to retail and telecom/digital business coupled with a new venture into emerging green business (EV) and deleveraging prospects in the coming years, RIL should be an attractive portfolio investment. With the credibility of Mukesh Ambani, impeccable management, a strong balance sheet, and the ability to raise funds at a cheaper cost for startup projects, RIL is now an ideal stock to reflect India's growth story. As RIL is always expanding or diversifying, its FCF often turns out negative as it’s employing cash for the next leg of growth even after attractive returns for shareholders (dividend, etc). RIL scrip, which was around 500.00 in early 2017, rallied over +470% in 5 years to 2855.00 in late Apr’22.

Technical View: RIL (LTP: 2275; EOD: 22/03/23)

Looking ahead, whatever may be the narrative, technically RIL has to sustain over 2325 for any further rally towards 2345/2385-2430/2465* and further 2500/2525-2635/2755, and 288/2855; otherwise sustaining below 2300, it may again fall to 2240/2200-2170/2150*, and further to 2100/2040-2000/1966-1659/1835*-1700/1400* zones in the coming days. For the time being 2170-2150 is a good positional support zone followed by 2000-1835 areas (for investment buying/accumulation purposes).

P/L Analysis: RIL (consolidated)-QLY

P/L Analysis: RIL (consolidated)-YLY

B/S Analysis: RIL (consolidated)-YLY

 

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