Energy business powers RIL: Q4 beats Street, outlook positive for stock

Led by the energy sector, Reliance Industries (RIL), the nation’s largest listed company by value, beat Street’s estimates for the second straight quarter. Although the operating performance of the retail segment was somewhat below estimates and the telecom (telecom) business (Reliance Jio) was broadly in line, sequential growth of 20 percent was in the oil-to-chemicals (O2C) business. It was he who helped the company compensated for the error in the consumer business. The energy sector accounts for more than half of consolidated operating profit and nearly three-quarters of the earnings.

Sequential margin gains in the O2C business were on account of a recovery in chemicals margins and cheaper U.S. ethane prices that fell 36 percent, according to Morgan Stanley Research.

Singapore’s gross refining margins improved sequentially to $8.2 a barrel in the October-December quarter, driven by the opening up of the Chinese economy and higher levels of mobility. However, there are concerns in the near term as the Singapore index has fallen sharply over the past two weeks – from $6 per barrel to $2.5 per barrel due to various demand and supply catalysts.

Spreads are dropping across products, with diesel being the hardest hit. However, Antique Stock Broking believes this is short-term in nature and should reverse as the supply-demand balance over the next two years continues to support the refining supercycle.

In the telecom segment, average revenue per user (ARPU) was flat and subscriber additions were up 1.6 percent sequentially.

Dolat Capital analysts, led by Himanshu Shah, say Jio’s Q4 2022-23 (FY23) financials were marginally better, led by stable network costs and higher ARPU at Rs 179.

The brokerage highlights steep capital spending, muted free cash flows, and high debt as key challenges for Jio from a short-to-medium-term perspective. The Street will be watching 5G adoption as the company aggressively improves its coverage and this translates to a higher ARPU. Increased adoption of broadband services and attractive pricing should expand the customer base and increase revenue per user.

The performance of the retail business was supported by a 41 per cent increase in the number of visitors to 219 million and an 18.7 per cent increase in the number of stores. Even with operating profits up 33% year-over-year and margins up 60 basis points, earnings were up 2% sequentially, while margins remained flat.

Aside from the high growth, net profit was down 13 percent year-over-year and flat sequentially, due to higher debt levels and interest costs, which rose 2.5 percent over the year-ago quarter, Nuvama Research notes.

The brokerage has maintained a “buy” rating on the stock and expects the next phase of growth to be driven by the company’s new energy segment. The company dropped the plan to merge new energy/renewable energy with itself and will continue to run the business through its subsidiary Reliance New Energy.

Brokerages will also track the debt trajectory as total consolidated debt increased by 18 percent year-on-year to 3.14 trillion rupees, while net debt increased more than 3-fold to 1.1 trillion rupees over the same period, owing to investments in the retail, digital and O2C sectors.

However, it indicated that it would keep its net debt-to-operating profit ratio below 1. Net debt-to-operating profit for fiscal year 23 was 0.7 times.

While the listing of the consumer business will be an important catalyst for the stock, investors are also awaiting announcements regarding the deconsolidation of Jio Financial Services.

Barring recent gains over the past month, the stock has been performing below record for most of the past year. Over the past year, the RIL rate has fallen by 16 percent; The S&P BSE Sensex rose 3 per cent while the Nifty50 rose 1.3 per cent.

BOB Capital Markets believes that the underperformance is due to the company’s expansion into FMCG (Fast Moving Consumer Goods) and financial services (Jio Financial Services), as well as its standalone 5G network.

Analysts at Sharekhan believe continued momentum in the consumer-focused business will drive RIL earnings growth and the potential Jio/Retail IPO will remain a catalyst. The brokerage has a “Buy” rating on RIL.