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Reliance Industries stock dips 6% post Q3; analysts see up to 21% upside

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Reliance Industries shares tanked as much nearly 5.7 per cent and hit an intra-day low of Rs 1,933 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 close, the counter was at Rs 1,940 apiece, down 5.4 per cent, and was the top loser on the benchmark S&P BSE Sensex. A combined 826.36 million shares changed hands on the NSE and BSE today.

Here's how brokerages have interpretted the result.

Nomura

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.

Goldman Sachs

TP: Rs 2,390 | Reco: Buy

Given the in-line result, we make no changes to our estimates or 12-month TPs of Rs 2,390/US$63.69 GDR which remain based on a SOTP methodology. We continue to use 8X CY22E (FY23E) to value the chemical business, and 6.5X for refining and marketing; we use EV/EBITDA to value the core refining and petchem business, and we use DCF to value the high-growth telecom and retail business (online and offline). We see 17% upside in our base case. Risk-reward remains positive, with 50% upside in our bull case and 9% downside in our bear case scenarios.

BofA Securities

TP: Rs 2,355 | Reco: Buy

RIL’s 3Q EBITDA/EBIT beat our estimate by 5 per cent/8 per centled by better retails and margins. 3Q normalized PAT at Rs 13,100 crore was 18 per cent higher than our estimate due lower than expected int income. 

We reiterate buy on favorable risk-reward. Catalysts: 1) App in app integration of JioMart in Whatsapp; 2) Potential launch of low cost Jio-Google smartphones and 3) Material uptake of fiber net adds.

JPMorgan

TP: Rs 1,990 | Reco: Neutral

EBITDA had a small miss across most segments, though continued 0% tax rate, and lower interest expenses drove an in line reported PAT. With Refining and Petchem folded into O2C, the segment was a miss and RIL did not disclose reported GRM’s as it now would report on an integrated O2C basis. We are surprised by the lack of any mention on the pet coke gasifier, where profitability should have been high given the sharply higher spot LNG prices.

While Jio ARPU’s were a beat, net subs addition was a large miss and this would worry markets given that FY22-23 earnings growth is dependent on tariff hikes. Retail EBITDA ex of Investment Income was soft.

While we maintain our FY22-23 earnings, 3Q highlights that earnings outlook for FY22 is increasingly binary in nature and entirely dependent on a) sharp refining recovery and b) large telecom tariff hikes with continued sub additions.

BNP Paribas

TP: Rs 2,367 | Reco: Buy

We reiterate our BUY rating on RIL with a revised SoTP based TP of Rs 2,367. The lower TP is largely due to a change in the net debt position as well as marginal tweak to earnings. Our FY21E earnings increases almost entirely due to the benefit from lower taxes and lower interest expense which should continue for 4QFY21 as well. We continue to like RIL shares but believe the near term weakness should continue until we see economics of the O2C business improve.

Bernstein

TP: Rs 2,470 | Reco: Outperform

Reliance Industries reported highest quarterly net profit of Rs 14,894 crore or Rs 19.9/share for 3QFY21 (+40% q-o-q, +26% y-o-y) which was 47 per cent higher than consensus estimates of Rs 10,110 crore. YTD net earnings totaled Rs 33,334 crore which is 86 per cent of our FY estimates and 83% for consensus. The strong beat came across all businesses and lower finance costs.

Citi

TP: Rs 2,130 | Reco: Neutral

We make 0-8% changes to FY21-23E earnings (9M performance, lower taxes). Maintain Neutral given lack of near-term triggers & limited upside.

Macquarie 

TP: Rs 1,350 | Reco: Underperform

We cut our FY22-23 EPS estimates ~3%, and note that our estimates still remain ~25% below cons. Against headline EPS growth of 10% Y/Y, we estimate underlying EPS was down ~30% in the Dec-Q. Today's stock price implies flawless execution on RIL’s multi-pronged growth aspirations combined with a premium over recent deal valuations.

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 news 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

Reliance Industries (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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