RIL Q2 earnings: Brokerages raise EPS estimates, see 10-20% upside in stock

NEW DELHI: Reliance Industries’ all-round show in consumer businesses more than made up for the soft energy business numbers in September quarter, making brokerages hike earnings estimates for the company by 5-10 per cent.

Many analysts expect 10-20 per cent upside in the stock over next 12-18 months, as the Mukesh Ambani firm is seen making further efforts to reduce debt following the conclusion of the investment cycle.

A few brokerages have projected RIL to become a $200-220 billion entity in next 4-5 years.

The oil-to-telecom major, which last week became the first-ever Indian company to breach Rs 9,00,000 crore in m-cap on the bourses, reported an 18.3 per cent surge in net profit at Rs 11,262 crore for September quarter, a record. The company recognised the entire MAT cut during the quarter with an effective tax rate of 20.8 per cent against 25.4 per cent reported for June quarter.

Telecom business Jio crossed Rs 5,000 crore Ebitda, a first, while retail business breached the Rs 40,000 crore revenue mark. Digital services revenue also did well, making up for the tepid oil business. Meanwhile, refining margins at 9.4 a barrel remained superior to Singapore’s $8.1 a barrel.

“A large investment cycle across segments comes to a conclusion, with incremental capex now mostly aimed at maintenance and capacity enhancement, as and when required. The focus now shifts to paring of debt (Rs 493 per share) and be net-debt (Rs 265 per share) neutral by FY21,” said Antique Stock Broking.

The brokerage, which has a price target of Rs 1,555 on the stock for March 2021, said the conclusion of large investment and eventual debt reduction would add to the positive sentiment.

“The expected capital infusion by Saudi Aramco and BP would only expedite debt reduction. In addition, consumer-facing businesses continue to grow in scale and profitability, thereby de-risking the earnings mix,” it said.

Nitin Soni of Fitch Ratings expects Jio to top the 375 million subscriber base by December end. He expects Jio’s revenue market share to touch 40 per cent by that time. In an interview with ETNOW, Soni said Jio has been adding about 8 million subscribers a month while Vodafone-Idea is losing about 1 per cent of the subscriber base every month, he said.

In case of retail business, RIL Retail’s quarterly revenue was higher than the annual revenue at the next largest retailer. Reliance Retail’s operations reached 24.5 million square feet in September quarter, a 25.6 per cent gain on a YoY basis. Nearly two-thirds of its stores are in tier 2-4 cities.

In case of refining business, Motilal Oswal Securities expects Singapore refining margins to stabilise at $5-6 per barrel over the medium term, as demand recovers slowly and a few high-cost refiners take shutdowns amid poor GRMs.

“Petrochem margins for RIL are expected to remain weak in the light of continued US-China trade concerns, the weak economic outlook and the strong additional supply globally over the next 2-3 years,” it said.

The brokerage, meanwhile, believes petcoke gasifiers have been fully commissioned, which should reduce capex, at least in the standalone business.

“We revise the valuation multiple for the core segment of refining and petrochem to 8.5 times (from 7.5 times earlier) FY21E EV/Ebitda to factor in enhanced delayed coke capacity, the widening of crude blend window for maximising distillate yields prior to IMO and the revival in petchem margins for the company under its flexible feedstock utilisation. The company expects to utilize the full economics of petcoke gasifier by Q4FY20,” the brokerage said, while recommending a target of Rs 1,630. The target is 15 per cent higher than Friday’s close of Rs 1,415 for the stock.

Emkay Global said while refining earnings were lower in September quarter on reduced throughput and higher opex due to the planned shutdown, Jio and Reliance Retail numbers were a beat on strong subscriber additions and margins, respectively. Petchem was largely in line, as volumes grew 14 per cent QoQ due to Q1 shutdown, it said.

RIL’s quarterly capital expenditure run-rate has come down to Rs 19,095 crore from about Rs 30,000 crore in last six quarters, while total debt increased to Rs 2.91 lakh crore in September 2019 from Rs 2.58 lakh crore in the same quarter last year, ET reported.

Axis Capital last week said Reliance Industries could be a $220 billion entity by FY24, which implies 17 per cent stock return CAGR over four years. It said investor concerns on debt levels seem overdone as RIL is likely to generate over Rs 4.4 lakh crore in cash flows over FY19-24E and expects its Tower InvIT to fetch Rs 11,800 crore.

“The company can be virtually debt-free on 20 per cent stake sale in O2C business to Saudi Aramco that will fetch $15 billion, Rs 24,800 crore from Fiber InvIT and value unlocking in Retail and RJio,” it said.

Foreign brokerage BofA-ML last week projected RIL to hit $200 billion revenue in 24 months on the back of its new commerce venture and fixed broadband business.


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