Subdued Q3 likely to keep RIL stock under pressure

Reliance Industries (RIL) could remain under pressure on the bourses, owing to lower-thanexpected December quarter numbers, lack of near-term triggers, and downgrades by some brokerages.

Though the stock has gained 11 per cent since its lows during early November, it is trailing the benchmarks by a significant margin, with the Sensex having gained 21 per cent during this period.

The firm has stopped reporting gross refining margins and has clubbed refining and petrochemicals under the oil-to-chemicals segment, for which operating profit was down 31 per cent YOY to ~9,150 crore, with sequential gains at 9 per cent. Rohit Ahuja of BOBCAPS Research says: “We need to see the earnings traction to justify the recent surge in the share price, as the rally has factored in the positives from debt reduction. O2C earnings growth remains elusive in the current pandemic-led uncertainty.” While cyclical business recovery will be gradual; dependent on economic growth and demand from user industries, analysts are positive on consumer-led businesses.

“Given the slightly subdued results, the stock could underperform in the near term, but over the medium-to-long term, there is growth visibility led by retail, telecom and digital which should support the stock,” says Pankaj Murarka of Renaissance Investment Managers. Though Jio’s subscriber addition has slowed, the jump in ARPU by 4 per cent to ~151, on a sequential basis, was better than the Street’s estimate of ~148.

The rise in per-user revenue was led by improving user mix and increasing data volumes. In addition to traction in the fiber broadband segment and the launch of a low-cost phone, the key near-term trigger is price hikes, expected to be taken after the March auction.

Analysts believe the segment could generate 15-20 per cent revenue/profit growth annually, led by new users, data volumes and price hikes. Its share of RIL’S consolidated operating profit, currently at 34 per cent compared to 23 per cent a year ago, will continue to rise given the estimated growth rates. The retail segment was impacted by Covid, with revenues down 19 per cent YOY. The transfer of petro retail dealership and conversion of Reliance Market stores to fulfillment centres also hit the top line. Analysts at Motilal Oswal Research say core retail segment revenues fell 30 per cent (excluding connectivity business), and this was weaker than the June quarter’s 18 per cent revenue decline. Margin improvement, however, was better than expected due to improving efficiences and strong digital sales, especially in the higher margin fashion and lifestyle segment. Analysts say its omnichannel strategy will help it tap the rising share of digital segment, while the ongoing expansion in physical stores will see traction.