RIL Q2: Subdued refining show is a temporary blip
Steady outlook for core energy businesses, digital services, retail keep analysts bullish on earnings
Reliance Industries’ (RIL) September quarter (Q2) numbers were a mixed bag, with retail and digital services (Jio) businesses continuing to post strong growth, while its core refining business performance was a bit disappointing, amid high expectations.
While the Street was expecting the per barrel gross refining margins (GRM) to trend down to about $10 from $12 a year ago and $10.5 in previous quarter, it came lower at $9.5 for
Q2. Softness in the benchmark Singapore
GRM, a maintenance shutdown at a refinery, and a sequential decline in light-heavy crude oil price differential, were reasons for the lower number.
Analysts, however see this as a temporary blip. RIL still outperformed the Singapore
GRM by $3.4 per barrel. During Q2, Reuters Singapore Complex GRM was down 26 per cent year-on-year (up 2 per cent sequentially) to $6.1 per barrel.
Analysts feel GRM will improve, as substantial investments in refining and petrochemicals over the past few years have started yielding benefits. The petcoke re-gasification project (PCG), for instance, is expected to boost GRM by $2 a barrel over the next two quarters, while new regulations will drive margins from the second quarter of FY20.
Petcoke replacing LNG will also reduce fuel costs, says an analyst at a domestic brokerage, who believes RIL can easily clock GRM of $11.5 a barrel on a sustainable basis. In the longer run, as OMO 2020 Sulphur regulations start driving GRMs, analysts at Goldman Sachs see peak a GRM potential of $1819 in 2020. The petrochemicals’ (Petchem) segmental profits, up 62 per cent YoY led by higher volumes from capacity expansions, and other positives like strong polyester chain deltas, stable polymer deltas, and feedstock cost optimization, are expected to maintain the trajectory.
A Deutsche Bank Research estimates petchem Ebitda (earnings before interest, tax, depreciation and amortization) to increase further in the current quarter on higher volumes from the refinery off-gas cracker project.
Abhijeet Bora at Sharekhan is optimistic on refining and petrochemicals margins, led by the ramp-up of recently commissioned downstream projects, and expects sustained improvement in digital services.
Jio saw net subscriber addition of 37 million — its fastest pace ever. Average revenue per user (APRU), despite the monsoon hungama offer, dropped 2 per cent sequentially to ~131, better than most estimates. The acquisition of controlling stake in cable players, DEN and Hathway will give it access to 27 million cable/broadband subscribers and thousands of local operators.
Retail grew at a robust pace with revenues, excluding petroleum and connectivity businesses, surging 147 per cent YoY in Q2. With outlook of energy and consumer businesses robust, analysts remain bullish on RIL. After earnings growth of 19-21 per cent in FY17-18, Nomura expects a stronger 33 per cent growth in FY19, driven by Petchem, and 21-22 per cent during FY20-21.