Analysts revise RIL’S estimates by 1-4%

Petchem, refining, and Jio did well; price hike in telecom next trigger

After a beat in the operational performance in the April-june quarter of 2021-22 (FY22), brokerages have revised upwards their earnings estimates of India’s largest listed company by market capitalisation, Reliance Industries (RIL), by 1-4 per cent.

The earnings revision has been led by an improvement in margin performance in Reliance Jio, oilto-chemicals (O2C) business, including the refining segment. But for major upgrades, the Street awaits other triggers to play out.

Although the biggest trigger continues to be tariff hikes, given the disproportionate impact they can have on Jio’s profitability and the Aramco deal, a further drop in debt levels and rebound in retail operations are the other sentiment drivers.

While Emkay Research has raised its earnings per share (EPS) estimates by 3-4 per cent over FY22-24, building in higher Brent crude oil prices, along with a weaker rupee and the company’s run rate in the June quarter, it has kept its target multiple and target price of ~2,340 largely unchanged.

Analysts, led by Bhaskar Chakraborty of Jefferies India, have increased their EPS estimates by 1 per cent for FY22-23 to factor in higher subscriber estimates for Jio and an even higher net interest income.

Post results, while a couple of brokerages are neutral, many including Morgan Stanley Research remain optimistic. Morgan Stanley believes an uplift in the Street’s expectations is imminent. The quality of earnings was good, with energy in the driver’s seat, gas production ramped up quickly, and net additions (net-adds) in telecommunications (telecom) were a surprise. A reset in both multiples and expectations is anticipated.

One segment that could drive the multiples is telecom. While Jio’s average revenue per user (ARPU) was flat sequentially at ~138.4, a key factor responsible for the operating profit beat was a sharp increase of subscriber netadds at 14.4 million; most analysts were working with adds half that number. Says Sanjesh Jain of ICICI Securities, “The subscriber adds during the quarter were strong at 14.4 million — over and above the 15.4 million added in the January-march quarter of 2020-21 — which benefited from aggressive Jiophone plans for one to two years.”

The adds helped Jio’s subscriber base go past the 440-million mark (and closer to the target of half a billion subscribers). While the flat ARPU was on account of higher Jiophone adds and recharges during lockdown, margins remained resilient.

Says Ashish Chaturmohta, director-research, Sanctum Wealth Management, “Although the overall ARPU was flat sequentially, margins — which came in at a 13-quarter high — were remarkable.” Jio’s operating profit margins expanded 13 basis points (bps) sequentially to 47.9 per cent.

The O2C business also delivered results slightly ahead of expectations, led by the petrochemical (petchem) segment. Despite a 15-30 per cent decline in domestic polymer and polyester demand, the company managed to keep the volume fall at 2.5 per cent, with exports helping bridge the gap.

Although petchem volumes are still 15-20 per cent below prepandemic levels, analysts at Jefferies expect these to improve in the second half of FY22. Refining margins, say analysts, are improving, coinciding with the US summer driving season, with normalisation of gasoline and middle distillate inventories.

The Street will await the closure of O2C stake sale (likely in December this year), which could help pare overall debt and improve the profitability of the business.

While Jio and the O2C segments outperformed, retail business disappointed. Retail operating profit fell over 37 per cent on a sequential basis and missed estimates by a wide berth. Operating profit margins were down 337 bps sequentially to 3.8 per cent. Although this was lower than the Street’s expectations, the retail metrics were not too different from those of Avenue Supermarts, which, too, reported a 400-bps decline in operating profit margins quarter-on-quarter to 4.4 per cent, while its gross margins hit an all-time low.

However, what separates the two and will drive Reliance Retail’s future growth is its omnichannel presence. While Dmart Ready — Avenue Supermarts’ digital vehicle — barely moves the revenue needle for the company (low single-digit contribution to revenue), multiple digital properties of Reliance Retail (Ajio, Jiomart), which now account for 20 per cent of sales, continue to see rapid growth.

Digital channels accounted for just 4 per cent of revenue a year ago. A rapidly growing strong store network, scaling up of Jiomart, and Future Group acquisition are seen as key enablers for the retail arm of RIL.