Reliance Industries Ltd. share price target

Robust performance in Digital & Retail offset by O&G; weakness In Q3FY20, topline remained under pressure as major revenue contributor, Refining and Marketing segments revenue slipped (-7.2% YoY; contributed ~49% of revenue) due to weak crude prices and geopolitical tensions impacting heavy crude sourcing & freight markets. Petrochemical segment also declined 19.1% YoY (~18% of revenue) due to lower price realization across product categories and global demand slowdown. This is partially offset by robust growth in Digital Services (+36.1% YoY; ~8% of revenue) and Organized Retail (+27.4% YoY; ~22% of revenue) with double digit likefor-like sales from existing store. Standalone exports fell 13.7% YoY to Rs. 53,804cr....

on account of 10.6% decline in order-to-cash (O2C) business revenues, with lower product price realization and 6.6% fall in Brent crude price. This was partially offset by continuing growth momentum in consumer businesses. Digital Services and Retail business recorded an increase of 36.2% and 27.4% respectively, in revenue during the quarter compared to the corresponding quarter of the previous year. Exports (including deemed exports) from RIL's India operations were lower by 13.7% at Rs 53,804 crore as against Rs 62,378 crore in the...

The much awaited IMO regulations will boost the core refining business. However, both refining and petchem segments face demand slack, given the impending capacity additions in CY20. We expect both segments to peak out in the near term. Monetisation of Jio's infrastructure is a catalyst, but timing/pricing are crucial. We remain NEUTRAL on RIL, post an underwhelming 3QFY20. Reported EBITDA was 10% below our estimate at Rs 128.71bn. Weak margins across petchem products and higher operating expenses have adversely impacted this segment. Our SOTP valuation is Rs 1,562/sh (7.5/9.0x EV/e for refining/petchem, 18.0x EV/e for Retail, 10x EV/e for Telecom business and Rs 116/sh for E&P; assets).

Key highlights from Reliance Industries' (RIL) Q3 financials: (a) Cyclicals under-performed on low GRMs (US$9.2/bbl, Vs US$10.7 ests); and tepid petchem margins (US$100/MT EBITDA, -23% QoQ)); (b) higher than expected earnings from retail Rs27 bn (+62% YoY, 6% margins) and (c) lower than estimates earnings from RJIO Rs58 bn (+9.6% YoY).

18 January 2020 Oil & Gas 3QFY20, primarily led by the better-than-expected performance of the Digital and Retail segments. However, higher depreciation/interest and lower other income led to in-line PBT of INR149.1b (our estimate INR142.9b, +3% YoY). The company recognized an exceptional item of INR1.8b toward license fees/spectrum usage charges. Reported PAT came in at INR118.4b (+10% beat, +14% YoY) and adj. PAT at INR119.8b (11% beat, +15% YoY). basis stood at 20.9% v/s 24.7% last quarter as the company benefitted from lower tax in the standalone business. RIL reported in-line standalone revenue of INR862.

Pressure on cyclical earnings

RJio and Retail neutralise uncertainty over cyclicals

In this report, we present key highlights from our recent meeting with Reliance Industries (RIL).

Assuming Rs25-30 hike in ARPU, it translates to incremental EBIDTA of Rs85100bn. Reliance JIO has launched All-in-One Plans' with higher tariffs following hikes by Vodafone and Airtel. After three years of severe tariff war, price hikes are welcome and we expect further hikes going forward. We increase RJIO's ARPU assumptions for FY21-22E to Rs 170 /180 vis--vis FY20 rate of Rs130....

High ARPU prepaid plans have seen ~27% price hike, which would result in ARPU increasing by INR38 from INR142 to INR180. While no rates have been disclosed for low ARPU Jio feature phone subscribers, we assume ~30% price hikes for these subscribers too. Low ARPU Jio phone subscribers would probably see a hike of INR25 in ARPUs from INR84 to INR109. The price differential between RJio and Bharti/VILs price plans is constant at ~INR40-50 for most of the popular quarterly bundled plans; however, we see the discount of RJios plan over Bharti/VIL reducing to ~8% from ~11-13% witnessed in the previous months. The hike in ARPUs should result in ~INR134b/INR119b incremental revenue/EBITDA, which is ~25%/58% rise over the previous revenue/EBITDA (2QFY20 annualized) with 89% incremental EBITDA. This is on the back of INR100b interest cost, which should be contained due to the recent capital reorganization announcements and reducing capex intensity in the market as indicated by RJio and other telcos.