Reliance Industries Share price and Target price Rs 2090: Buys says HSBC, RIL morphing into this

Reliance Industries Share price and Target price: Q3 consolidated clean EBITDA almost returned to the pre-Covid level with the company reporting Rs 216 bn, which is 14% qoq growth, marginally ahead of expectations. However, it is the movement between the lines which surprised. Importantly, Reliance Industries is morphing into a pure consumer company with a reporting structure which now includes a single Oil to Chemicals (O2C) segment, vs the traditional Refining and Petrochem segments, as it endeavors to move further downstream towards consumer products.

Reliance Industries retail EBITDA turned out stronger at Rs 31 bn, up 54% qoq (now excluding petroleum retailing) despite weaker than expected revenue, as high margin fashion and lifestyle grew 1.5x qoq and investment income contributed Rs 7.7 bn. The tax rate remained near zero on account of the reorganization of O2C, the benefit of which is now expected to continue into Q4.

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Maintain Hold rating on Reliance Industries:

HSBC only slightly tweaked their Reliance Industries earnings estimates for FY22/23 by 0.5-1% and 7% for FY21 as HSBC adjusted taxation. HSBC continues to value Reliance Industries on a sum-of-the parts basis, with a target price of Rs 2090 (unchanged), which implies 2% upside.

Reliance Industries Key performance indicators:

(1) Reliance Industries O2C EBITDA benefited from improved petrochemical margins and a strong demand uptick for polyester products (up 38% qoq) but HSBC believes the flat refining margin limited the improvement
(2) Reliance Industries retail revenues were flat qoq (adjusting for petro retail) though down c10% qoq on a reported basis as local disturbances hurt the pace of recovery of the grocery business even as the company added 327 new outlets. The clean EBITDA margin was 7% (ex-investment income) vs the comparable 6% in 2Q, per our calculations
(3) Reliance Industries digital services continued its journey of increasing ARPU, now INR151, up 4.1% qoq but saw weaker net subscriber growth (which the company attributed to churn due to local disturbances
(4) Reliance Industries Oil & Gas segment, a still fledgling business, has now started on its journey of increasing gas production from the current 4.5mmscmd to 30mmscmd by CY23
(5) Reliance Industries reported net debt reduction in 9M was Rs 1.2 trn vs a fresh capital infusion of Rs 2.2 trn and 9M cash profit generation of Rs 570 bn as the bulk of the cash went on reducing creditors for capex and other payables

Investment view on Reliance Industries:

Longer term, HSBC continues to like Reliance Industries Its business and balance sheet and believe all three of its core businesses – O2C, Retail, and Digital Services – have become self-sustaining and cash-generating, with Retail and Digital growing strongly. Reliance Industries has outperformed the Nifty 50 by 12% in the last twelve months, despite having underperformed by 24% in the last three months. However, with the value of the Digital and Retail businesses now visible, and with the O2C business likely to remain weak owing to global trends, HSBC sees a lack of catalysts in the near term.

Key downside risks for Reliance Industries:

Lower O2C margins than HSBC now forecasts and a slow uptick

Key Upside points for Reliance Industries:

Closure of the deal with Aramco and a large investment in Retail