Strong Q2 Performance Likely to Take RIL Stock to New Highs
GOOD SHOW Jio’s numbers, improving petrochem profits may sustain its outperformance
Ashutosh R Shyam
ET Intelligence Group: Shares of India’s largest company by market value Reliance Industries, which hit a new high of .₹ 891 on Friday, are likely to outperform the benchmark Sensex in a sustained manner in the medium term following betterthan-expected profitability of its telecom arm and improving earnings in petrochemicals.
In addition, the capital expenditure incurred in September came down to ₹ 15,653 crore from ₹ 25,192 in the June quarter, suggesting that the cycle of colossal spending is coming to an end.
This could convince analysts to revise their projected consolidated earnings per share estimates upwards for the next three years and assign a higher valuation for the telecom unit. The impact of the financials of Reliance Jio Infocomm, the telecom arm, on Reliance’s consolidated earnings was lower than investors expected. This could allay fears of sub-optimal returns on more than ₹ 2 lakh crore invested in (Q2FY18) (Q1FY18) (Q1FY18) Peer Comparison the telecom venture.
Reliance Jio posted an operating profit (EBITDA) of ₹ 1,443 crore in the three months ended September compared with the consensus estimate of an operating loss of ₹ 1,000 crore to ₹ 1,500 crore. Jio’s operating profit margin was 23.5% and the average revenue per user (ARPU), a key performance indicator in the telecom industry, was ₹ 156.4 per month, Reliance said in a statement on Friday.
Rivals Bharti Airtel and Idea Cellular had operating profit margins Core Business Margin Picture Petrochemical of 33% and 28% in the past financial year, according to Bloomberg.
Analysts said one of the prime reasons the company can post better margins is because it capitalised several cost factors in comparison with expenses.
The street had been pricing in an operating profit margin of less than 20% for the current year. With that margin having exceeded expectations in the September quarter, projected estimates on this count are likely to be revised upwards. This is likely to boost the valuation of the telecom arm.
Jio could add to consolidated ear- Refining nings per share from as early as the next financial year. Before the September quarter results, CLSA had estimated Jio would add ₹ 4.7 and ₹ 16.7 per share for FY19 and FY20, respectively. On the other hand, Kotak Institutional equities expected a negative contribution of ₹ 10 and ₹ 7 per share in the same period
A higher operating profit margin means more internal funds to pay for interest and depreciation and as a result, a narrower loss before tax. Analysts currently ascribe a value of ₹ 250-300 per share for Jio through a sum-ofparts valuation.