Reliance Industries rating – Add: Final quarter results were a mixed bag

RIL delivered a sustained recovery in operating performance in Q4FY21 with retail revenues and Jio subscriber additions returning back to pre-Covid levels and O2C/upstream contribution rising sequentially. However, miss on Jio’s ARPU, elevated level of capex, recurring adjustments in balance sheet and limited disclosures remain areas of concern. We cut EPS estimates modestly, while retaining Add noting limited upside to our unchanged FV of Rs 2,050 and lack of positive triggers in the near term.

O2C and retail surprise positively, while Jio misses estimates: Q4FY21 consolidated Ebitda was 6% above our estimate at Rs 233.5 bn (+8% q-o-q), reflecting improvement in operating performance across all segments except Jio, which was below expectations. (i) Retail posted a strong comeback, reporting its highest revenues (+23% q-o-q) and Ebitda (+33% q-o-q), excluding investment income, led by a strong rebound across core categories including 10% share from digital and new commerce forays, expansion in margins and significant increase in footprint (+2.6 mn sq. feet). (ii) O2C/upstream segments benefitted from higher volumes and margins. (iii) Upstream Ebitda increased sharply due to ramp-up in gas production. (iv) Jio’s Ebitda increased modestly by 2% q-o-q, 5% below our estimate, as healthy 15.4 mn subscriber additions was offset by 4% lower-than-assumed ARPU.

Adjusted consolidated net income was 6% below our estimate at Rs 124.3 bn (EPS of Rs 20.6, ex-treasury shares), due to rise in tax rate to 9%. Reported net income was higher at Rs 132.3 bn including exceptional gain of Rs 8.5 bn from divestment of certain shale assets.

In FY2021, consolidated Ebitda declined 8% to Rs 807.4 bn due to lower contribution across all segments except Jio; adjusted net income reduced 1% though to Rs 434.9 bn (EPS of Rs 72.1) aided by higher other income, lower interest expense and lower tax rate, which was partly offset by higher D&A cost.

Capex remained high at Rs 797 bn: We estimate effective net debt of Rs 594 bn ($8 bn) as of March 31, 2021 versus Rs 2.49 trn ($33 bn) a year ago; effective net debt would have been higher at Rs 992 bn excluding Rs 398 bn of call money receivable on rights issue, that RIL accounted in financial assets. Capex remained elevated at Rs 797 bn for the year; cash capex was higher at Rs 1.06 trn including repayment of capex creditors. FCF was negative at –Rs 888 bn due to repayment of capex creditors and WC liabilities, bulk of which were accounted during H1FY21. CWIP and IAUD increased to Rs 1.26 trn from Rs 1.09 trn a year ago and other non-current assets increased to Rs 650 bn.

Cut FY2022-23e EPS by 2-5%: We cut EPS estimate by 5% in FY2022 and 2% in FY2023, while broadly retaining our Ebitda forecasts, factoring in (i) Covid-related impact on retail business, (ii) higher subscriber additions and lower ARPU for Jio, (iii) higher capex run-rate and (iv) other minor changes. Our Fair Value remains unchanged at Rs 2,050 based on March 2023 estimates.