Reliance Industries stock dips 5% post Q3; analysts see up to 21% upside

shares tanked as much nearly 5 per cent and hit an intra-day low of Rs 1,953 on the BSE on Monday as investors booked profits after the company announced its results for the third quarter ended December 2020 (Q3FY21). The numbers were unveiled post market hours on Friday.

The oil-to-telecom conglomerate’s consolidated net profit of Rs 13,101 crore in the December quarter jumped 37 per cent sequentially, and beat Street expectations of a 32 per cent QoQ PAT improvement. On a yearly basis, the profit grew 12.5 per cent as lower expenses cushioned earnings even as revenues declined. READ ABOUT IT HERE

According to Bloomberg estimates, the company’s top line was seen at Rs 1.209 trillion in the December quarter, while the bottom line was expected to be at Rs 10,107 crore. In segment-wise revenue, the company’s digital services was the only business that saw an uptick – of 33 percent on a year-on-year (YoY) basis at Rs 23,678 crore. Oil-to-chemicals, oil and gas, and retail were down 30 per cent, 51 per cent, and 19 per cent, respectively, on a year-on-year basis.

At 9:50 am, the counter was trading 4 per cent lower at Rs 1,969, and was the top loser on the benchmark S&P BSE Sensex, as against a 0.28 per cent decline in the S&P BSE Sensex. A combined 8.75 million shares had changed hands on the NSE and BSE till the time of writing of this report.

Here’s how brokerages have interpretted the result.


Target Price: Rs 2,400 | Reco: Buy

RIL’s 3Q consolidated EBITDA was 3 per cent below our estimates. The miss was largely on energy business with standalone EBITDA 12 per cent below our estimates. RIL has reorganized its reporting to combine the refining and petchem segments as a single O2C segment. With the changed reporting, it has not disclosed refining GRM, which makes quarterly comparisons difficult. Petchem was further strong QoQ (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 2Q).

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 per cent upside. RIL has outperformed the NIFTY for the past six years, and with strong growth the outperformance will likely sustain.

Credit Suisse

TP: Rs 1,930 | Reco: Neutral

Q3FY21 was below expectation on lower Retail sales, weak O2C margins, and low subscriber addition in Jio. Going forward, key catalysts are launch of affordable 4G smartphone which can aid towards subscriber addition; strategy to transition kirana stores buying from cash-and-carry to JioMart, which could expandits reach; update on O2C deal as oil prices recovered; launch of integrated digital health/education apps; and growth plans of Financial Services.

Our estimate is lower than consensus by 12-13 per cent due to moderate ramp-up of Refining margins and price hike in Telecom starting mid-FY22. We cut FY22E/FY23E EPS by 4 per cent/3 per cent as we push Jio’s 500 million subscriber base to mid-FY23 and factor in slower Retail recovery.

Motilal Oswal Financial Services

TP: Rs 2,325 | Reco: Buy

Consolidated Dec’20 debt stood at Rs 2.57 trillion cash and cash and equivalents at Rs 2.2 trillion. The company received Rs 73,500 crore in 3QFY21, and considering balance commitments of Rs 39,800 crore, ceteris paribus, the company’s net cash stood at Rs 3,000 crore.

As RJio’s growth slows, Jio Platforms Ltd, its holding company, is keen to replicate the success of Wireless in other business streams. With aggressive plans and product launches in place, Jio Platforms is creating multiple monetization opportunities in the Digital space.

Thus, we assign an EV/EBITDA multiple of 17x on FY23 EBITDA, maintaining target price of Rs 900/share (for its 66 per cent stake). The higher multiple captures digital revenue opportunity, potential tariff hikes, and opportunity in the Low-cost Device market, among others, not built into our estimates.

We roll forward the valuation on an FY23 basis, valuing Reliance Retail’s core business at 30x EV/EBITDA and assigning 4x to Connectivity, arriving at TP of Rs 645 – after excluding the recent 10 per cent stake sale. Our premium valuation multiples capture the opportunity for rapid expansion in the Retail business and the aggressive rollout of the JioMart platform.

Kotak Institutional Equities

TP: Rs 2,050 | Reco: Add

RIL’s operating performance across segments was weaker than our expectations in 3QFY21. Debt reduction was lower as a significant portion of inflows from capital raise and cash profits was once again utilized in capex, working capital and repayment of creditors. Lesser disclosures could have been avoided. We expect the stock to remain muted as digital initiatives remain WIP with limited tangible details to appreciate the long-term narrative for now.

We cut FY2022-23E EPS by 6 per cent factoring in (1) lower downstream margins, (2) lower subscriber additions, (3) lower retail revenues and margins and (4) other minor changes. We raise FY2021E EPS though by 9 per cent reflecting positive variance in below-EBITDA items and negligible tax rate. Our SoTP-based FV reduces to Rs 2,050 from Rs 2,150 on lower estimates and higher debt.

Edelweiss Securities

TP: Rs 2,105 | Reco: Hold

Reliance Industries’ Q3FY21 EBITDA of Rs 21,500 crore (down 4 per cent YoY) came in line with our estimate. PAT of Rs 13,100 crore beat estimate, but was entirely driven by investment

income and a near-zero tax liability. O2C & retail missed expectations, but RJio beat forecasts. While recovery is underway, it is mixed.

But, transparency levels are falling across businesses. RIL has stopped reporting a key matrix—GRM—altogether. Similarly, it has ceased providing division-wise turnover breakdown for retail and RJio’s key driver FTTH lacks granularity. In our view, primary stock triggers—deleveraging, asset monetisation, digital momentum—have played out.

Retail PAT attributable to RIL is diluted by 10 per cent stake sale, resulting in estimated 7 per cent YoY PAT fall (standalone up 4 per cent). Similarly, on 33 per cent stake sale, attributable PAT growth dips to 63 per cent YoY for RJio versus standalone of 144 per cent. While consumer-facing, RJio and retail optically contribute to half of RIL’s EBITDA, it falls to only 29 per cent at attributable consolidated PAT level.

Prabhudas Lilladher

TP: Rs 2,232 | Reco: Buy

We leave our FY22/23E estimates unchanged, but increase FY21 estimates by 34 per cent to factor in deferred tax credit for restructuring of the O2C business and other changes in depreciation and finance charges. Recovering economic activity augurs well for all RIL’s business segments and downstream focus will create value going ahead. RIL with its stated intention to monetize and forge global partnership across businesses, is well positioned to incubate new business and pursue inorganic opportunities given its liquid BS. We believe positive flow on global partnerships or stake sale is likely to keep valuations at elevated level. Maintain BUY with a PT of Rs 2,232 (unchanged).

HDFC Securities

TP: Rs 2,330 | Reco: Add

Our ADD rating on RIL with a price target of INR 2,330 /sh is premised on (1) induction of Facebook, Google, Intel and Qualcomm as partners in Jio Platforms, which should help the company accelerate the growth of digital connectivity and create value in the digital ecosystem through technology offerings, (2) recovery in refining and petchem businesses in FY22E, (3) the emergence of a clear path to a stronger balance sheet, and (4) stake sale in the retail business.

We have raised our FY21/22 EPS estimates by 22.0/11.5 per cent to Rs 69.9/91.5 per share, mainly to account a better-than-anticipated 9MFY21 performance, and a lower-than-expected tax outgo in FY21.

We use EV/EBITDA to value downstream at Dec-22E EV/e, Retail on peer benchmarked EV/e and E&P, Jio on DCF. The stock is currently trading at 12.2x Dec-22E EV/EBITDA and 22.4x Dec-22E EPS.

IDBI Capital

TP: Rs 2,475 | Reco: Buy

(RIL) Q3FY21 result was below our estimates at operational level (in line with consensus) while PAT was higher than our and consensus estimates on the back of deferred tax reversal and lower interest cost.

Higher volume in O2C, robust polymer margin, higher ARPU and lower effective tax rate along with lower interest and higher other income swelled net profit. However, the company’s new reporting structure (integrated refining and petrochem division to O2C business), led to non-disclosure of GRM. Lower crack spreads and weaker retail division (excl investment income) performance during Q3 was a disappointment.

With vaccination drive, we expect GRM to improve further led by pick-up in economic activity. We raise PAT estimates for FY21E by 16.6 per cent to factor in lower tax rate and lower interest outgo while keep other estimates largely unchanged. We slightly tweak our TP to Rs 2,475 from Rs 2,468.

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