Brokerages lower Reliance's FY23 earnings estimates after Q1 miss

While Street is bullish on retail, Jio prospects, near-term O2C outlook led to cuts

A net profit miss for the April-June quarter (first quarter, or Q1) of 2022-23 (FY23) of the country’s largest listed company by market capitalisation - Reliance Industries (RIL) - and other headwinds led to a downward revision of the earnings estimates by brokerages for FY23 and 2023-24.

Led by Dayanand Mittal, analysts of JM Financial have cut their FY23 net profit estimates by 4.3 per cent, incorporating slightly lower gross refining margins (GRMs) and normalised tax rates. RIL had highlighted after its results that recession worries could impact the sector, depressing prices and margins.

While there are triggers arising out of the Russia situation, which will benefit the middle distillate margins, limited spare refining capacity, reduction in China exports, and unlocking of economies, the Street believes, are offset by demand worries and rate hikes.

Also Read | RIL Q1FY23 results: A look at the company's performance in last 4 quarters

Swarnendu Bhushan of Motilal Oswal Research says the brokerage has cut the second-quarter (Q2) FY23 gross refining estimates ($ per barrel) from $14 to $10, on the back of declining Singapore GRMs. The benchmark is now at sub-$3 levels last seen a year ago.

While the oil-to-chemicals (O2C) segment - which accounted for 91 per cent of incremental operating profit in Q1 - was up 40 per cent on a sequential basis, it missed Street estimates by over 14 per cent.

Notwithstanding the all-time high GRMs, the rise in the official selling price in West Asia crude by $4-5 per barrel, higher energy and freight costs, and lower volumes due to shutdown of diesel hydro-desulfurizer unit dented the segment performance.

While the near-term outlook is weak, GRMs are likely to improve in the second half.

Say analysts of Emkay Research, led by Sabri Hazarika, “While Q1 numbers were a miss and Q2 GRMs are also down, we expect them to stabilise at more normative levels with the winter ahead providing support.”

While there has been considerable volatility in the O2C segment, the secular uptrend in the digital and retail business continued in Q1 and the outlook remains upbeat.

Operating profit for the digital business was up nearly 5 per cent on lower network cost, higher average revenue per user (ARPU), and subscriber additions (adds). Given the price hikes, ARPU, which came in at Rs 176 in Q1FY23, was up 27 per cent year-on-year and 4.7 per cent sequentially. The metric is on an upward trend, registering growth for five consecutive quarters.

Net subscriber adds, too, have been strong. At 8.8 million net adds, the company has been able to reverse the declining trend in adds in the prior three quarters due to subscriber clean-up and SIM consolidation. The total subscriber base increased 9.7 million, compared with brokerage estimates of 6 million. The total customer base at the end of the quarter stood at 420 million.

All key metrics, such as overall data traffic, data consumption, and minutes of usage per subscriber, are on an uptrend, signalling the acceptance of higher tariffs.

While the near-term outlook will depend on the outcome of the 5G auctions, over the medium term, the key monitorables are the trend in ARPUs and subscriber adds.

For the retail segment, Q1 was normal without the Covid-related disruptions, leading to a fully operational network of 15,866 stores. The pace of store additions at 792 is at the same level as the January-March quarter of 2021-22 adds. The overall footfall has exceeded pre-pandemic levels. This assisted in doubling the grocery revenue, while fashion and lifestyle sales were 3x higher, compared with the year-ago quarter, supported by the opening of malls, festival season sales, and weddings. Digital and new commerce businesses also doubled and contribute about a fifth to retail revenue.

Given the strong showing across key verticals, the retail business reported its highest-ever revenue. Operating profit margins expanded 160 basis points (excluding investment income) to 7.4 per cent, aided by a favourable revenue mix, given the higher contribution from consumer electronics, fashion, and lifestyle, as well as operating leverage.

While retail revenues were at record levels of Rs 51,600 crore in Q1, on a three year basis, the company posted 15 per cent compound annual growth rate. This was lower than the 20-22 per cent growth rate reported by Titan Company and Avenue Supermarts (DMart).

Emkay Research believes the sluggish growth rate is likely due to weaker performance in the low-margin connectivity business as operating profit grew faster at 24 per cent annually, compared to just over 19 per cent for DMart.

In addition to ongoing expansion and improving mix, which should boost overall revenue and margins, the key trigger for the business would be traction in the digital/new commerce segment and acquisitions. Any value-unlocking move - both for retail and digital - would be incrementally positive.

For most brokerages, the target prices after RIL’s Q1 results is in the Rs 2,800-3,000 per share band and translates into an upside of about 20 per cent.

Investors can consider the stock on dips.