A golden age of refining, suffocating global gas markets, and enhancing telecom subscriber quality heads towards a $20 billion EBITDA run rate for Reliance Industries by 2022.
Along with the five-pronged tailwinds, the new energy business could add to Reliance Industries’ $ 50 billion value creation in 2022.
The five-pronged tailwinds seen for Reliance Industries’ $ 50 billion value creation:
1. Recovering Petrochemical Margins:
Petrochemical margins are recovering as prices increase with oil pricing moving up. However, the expected inflation in the global cost curve and supply chain challenges are likely to drive margins for two-thirds of Reliance Industries’ product portfolio to above its mid-cycle levels by the end of CY2022.
2. Higher gas ASPs:
Reliance Industries is generating 18+ units of gas from its KG basin, which is expected to rise to 30 units of peak production over the next two years, starting in January 2023.
The rising production and a tailwind from rising global gas prices could increase Reliance’s profitability multi-fold over the coming years.
Moreover, gas prices for Reliance’s KG gas fields rose to $9.9/MMBtu in Apr-22, from $6.13/MMBtu in Q4FY22, and management expects further increases in the upcoming six-monthly reset in Oct-22.
It should help approximately double Reliance’s EBITDA by the end of CY2022.
3. Telecom – Improving subscriber trends and quality
Reliance lost 10.8 million subscribers in Q4FY22 vs. 8.4 million in Q3FY22, with the active subscriber base increasing to 94% in February 2022 from 85% in Q3FY22.
Gross subscribers were summed up by 35.3 million, so a reduction in churn should drive net additions to be positive in FY23, as a large part of sim consolidation challenges are decreasing.
4. Scaling up the Digital revenues:
Digital EBITDA (ex-telecom) for FY22 stood at $200 million; however, earnings contribution was restricted. The scale-up of digital revenues is critical for Reliance to command higher than telecom multiples.
In its earnings presentation, management highlighted incremental focus on delivering an end-to-end product suite for enterprises and offering managed services solutions around cloud, IoT, and security solutions, thereby shifting them from Capex to Opex.
The company’s overall investments are in Two Sigma for artificial reality, and the JV with SES offering satellite-based broadband to enterprises should come in handy over the medium term.
Net debt and CAPEX:
Reliance’s FY22 investment of $13 billion increased 25% YoY, and it is believed that this increment should maintain this at such levels for the next few years. Around 30% of the CAPEX was in telecom, 20% in oil to chemicals, 30% in retail, and 11% in new energy.
Along with spectrum acquisition, total investments were $19 billion. Net interest cost was nearly zero for the first time in nearly three years as net debt declined. Along with spectrum liabilities, total debt at the end of FY22 was $10 billion, with Jio’s net debt at $5.4 billion.
5. Retail: Significant inflection in investments in FY22:
Retail revenue increased at a 16% CAGR over two years, compared to 11% for DMART and 17% for Titan. New store additions drove a significant portion of the growth.
Revenue per sqft declined at a 4% CAGR, which implies room for improvement as the economy opens and footfalls rise.
Reliance emphasized synergies between online and offline consumer bases, with consumers in omnichannel platforms having 35% higher revenues than usual.
Reliance now has 500+ stores in electronics, 600+ in fashion and lifestyle, and 2000+ in groceries. Drawbacks are now 4% above pre-Covid levels, and Q4FY22 saw double-digit growth across all consumption baskets.
The company is strengthening its warehousing capabilities, which have multiplied, and now has 22.7 million sqft of warehousing space with 334 warehouses.
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