Credit Suisse downgrades RIL to underperform, reduces target price

The report pointed out that RIL's free cashflow (FCF) has been in negative for six years

Credit Suisse has downgraded Reliance Industries (RIL) from neutral to underperform, on the back of higher liabilities and slow enterprise roll-out for the telecom business. The brokerage reduced its target price for the company to Rs 995 per share from Rs 1,350 apiece.

“Our target price cut factors in higher liabilities of $10 billion from crude payables, JioPhone financing and East West Pipeline, multiple cuts and lower earnings for refining, and slow enterprise roll-out and weak Jio ARPU in the first quarter,” analysts with Credit Suisse said in the August 5 dated report. ARPU is average revenue per user.

The report pointed out that RIL has been free cash flow (FCF) negative for six years. “Given margin pressure in refining and petrochemical (high supply), FCF should be negative for the financial year 2020-21,” the report said. 

On the liabilities side, Credit Suisse said RIL’s liabilities increased from $19 billion to $65 billion in four years. The company’s crude payables have also increased and are higher compared to global peers such as Valero in the US, Korean refiners, and Indian oil marketing companies, according the report. 

“RIL’s standalone payable days (mainly crude payables) have increased significantly over the past four years. It used to be in the range of 50-60 days, but was high at 121 days in FY19. Payable days reduced from high of 163 days in FY18 to 121 days in FY19 but are still 2-4 times of peer average. 

Most of the peers have crude payable days of 30-60 days,” the report said.

On RIL’s telecom business, the report said: “Jio’s capital employed per user is $105 (excluding capitalised expenses) and the current Ebitda per user is $9 (with no rentals on InvIT and benefit of lower access charges). Return on capital employed (RoCE) currently is low at less than 3 per cent.” 

“For Jio to make 9 per cent RoCE, Ebitda per user needs to increase to $16, requiring 50 per cent more price increase in only telecom or through a combination of monetisation through merchant point-of-service network.” Ebitda is earnings before interest,taxation, depreciation and ammortisation.

For the refining business, Credit Suisse said: “We do build upside from IMO 2020 but given high-supply pressure, the duration of benefit may not be long. We expect large capacity additions over the next four years (especially in 2021 and 2022) and together with lower demand, we are cautious on outlook for the refining segment.”