Capex done, Mukesh Ambani's Reliance Industries on course to reap gains

Return ratio, which had dipped to 9% after the start of the capex cycle in 2013, is expected to improve to 14%

With capex (capital expenditure) on the telecom network roll-out and capacity additions in the energy vertical behind it, FY19 could see the start of the monetising cycle for Reliance Industries (RIL).

The company, which announced the launch of its wireline broadband services on Thursday, has invested over $35 billion in its telecom venture and $20 billion in the energy segment over the past five years. With capex slowing, telecom subscriber addition remaining high, energy margins moving to a higher level, analysts at Morgan Stanley say, average earnings growth is expected to be at 20 per cent over the next three years. Further return on capital employed, which had trending down to a low eight-nine per cent after the start of its investment cycle starting 2013, is expected to move up to 14 per cent over the next couple of years. 

The biggest gains from fresh investments will be from the telecom vertical. Given the introduction of lower priced as well as upgraded Jio phones, analysts expect the number of subscribers to jump sharply; from 187 million in FY18 (currently 215 million), it is expected to double to over 400 million by 2022. 

With average revenue per user improving over the next couple of years to Rs 150 (FY19 expected to be at Rs 120), revenue is expected to jump fourfold to Rs 800 billion, from FY18 levels of Rs 202 billion.  RIL is targeting 50 million users, with the latest addition to its telecom offerings, JioGigaFiber, which is expected to be priced at around Rs 500, compared to competitor prices of Rs 600-Rs 800 per user. 

Given the launches, market share gains and uptick in realisations, the telecom vertical, which barely contributed to its bottom line, is expected to account for a quarter of the consolidated net profit over the next three years. Return ratios in the telecom business, which are under a per cent, now are expected to move up to 10 per cent, as operating profit hit Rs 450 billion, while net profit is expected to improve to Rs 155 billion by 2021. 

The retail business, which had revenue of Rs 690 billion, has doubled in FY18 on the back of 350 million footfalls in the company’s 7,500 stores. Analysts expect the bottom line of the retail business to double over the next two years, with triggers being new store openings and retail pump station expansion. 

In its core refining & petrochemical business, expansions in the new paraxylene, refinery off-gas cracker and its downstream units have contributed to the growth of the petrochemical business. In fact, the 20.3 per cent growth in consolidated net profit in FY18 was primarily driven by the petchem division. Analysts at Kotak Institutional Equities expect petchem sales volumes to increase to 18.9 million tonnes by FY21, from 16.4 million tonnes in FY18, led by full ramp-up of expansion projects. They expect petchem operating profit to improve to $236 per tonne in FY20, from $221 per tonne in FY18, due to further integration benefits from the new projects and traction in the polyester cycle. 

In refining, outlook on gross refining margins (GRMs), which have moderated slightly from peaks, given volatility in crude oil prices, are expected to stabilise. What should help is the stabilisation of the Phase 1 of the petcoke gasification (last pending project), resulting in major gains. GRMs should gain further on international maritime organisation regulations, requiring the reduction of marine fuel sulphur by 2020 and RIL is well positioned to take advantage of the same.