Strong Q2 Per­for­mance Likely to Take RIL Stock to New Highs

GOOD SHOW Jio’s num­bers, im­prov­ing petrochem prof­its may sus­tain its out­per­for­mance

The Economic Times - - Companies: Pursuit Of Profit -

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.

Tele­com: RIL:

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