Retail, telecom rebound to boost near-term sentiment for RIL stock: Experts

The two segments account for half the consolidated operating profit, with retail being the key outperformer in Q2

The Reliance Industries (RIL) stock, which has been on a downtrend recently, is expected to rebound on the back of better-than-expected performance in the September quarter. The stock has been missing triggers after news on fund flows into its telecom and retail businesses, debt reduction, as well as the muted outlook for the legacy oil and chemical business.
 

In addition to the Q2 performance, the Street will keep an eye on the progress in the Future Group deal, any tariff hike in the telecom business, and a further stake sale in the oil and chemical business. Deepak Jassani, head of retail research at HDFC Securities, said: “The Street awaiting triggers will be watchful of potential restructuring and value unlocking in the retail and/or telecom business.” 
 

The Street’s attention will be on the digital and retail segments as the two are now contributing half the consolidated operating profit. The company did not disappoint the Street on the operating performance of these two high-growth businesses.
 

In the telecom business, revenue growth of 36 per cent was led by a steady uptick in subscribers and a jump in the average revenue per user (ARPU). On a sequential basis, the company’s ARPU at 3.3 per cent was slightly ahead of Bharti Airtel’s (Airtel) per user revenue led by subscriber additions, while 13 per cent YoY growth was aided by the price hikes taken in December last year.

 

Subscriber additions were up 1.8 per cent over the year-ago quarter and 2.6 sequentially. While Jio’s subscriber addition was less than Airtel’s, its base at 406 million was 38 per cent higher. Strong top-line growth helped boost the operating profit in the segment by 53 per cent YoY.
 

ARPUs are now expected to trend up on higher data usage because of the work-from-home scenario, over-the-top entertainment, and the return of sporting events. However, the launch of the 4G feature phone may moderate ARPU growth. The bigger trigger will be tariff hikes, which can significantly add to its profits.
 

The retail performance was even better than the Street’s expectations. While reported numbers were still shy of growth seen during the pre-Covid period, there was strong sequential recovery, led by higher sales of essentials, such as food and grocery products. The gradual relaxation in the lockdown helped improve footfall and volumes, with the overall retail showing ahead of peers. While sequential growth of 30 per cent in revenues was strong, what stood out was an 86 per cent jump in the operating profit; estimates ranged from 34-50 per cent.
 

In addition to the physical stores, the omnichannel offering, especially Jio Mart, has significantly aided retail growth. Analysts said the company’s focus on enhancing its presence and network across all categories should drive the top line.
 

In its legacy business, while the disappointment in the refining segment continued, petrochemicals saw a rebound on a sequential basis. The higher placements in domestic markets and operating efficiencies meant that the petrochemical operating profit improved 34.6 per cent sequentially, with a margin expansion by 250 basis points outpacing revenue growth of 17.8 per cent. 
 

In refining, the gross refining margin (GRM) was lower than analyst estimates. Though the benchmark average Singapore complex margin for the quarter improved from negative $0.9 a barrel during Q1 to $0.5 a barrel in Q2, the Arab light-heavy distillates were down and a tight supply of medium/heavy sour crude meant higher crude oil costs for Reliance. Hence despite maintaining premium to the benchmark, the GRM at $5.7 barrel declined from $6.3 in the previous quarter and was lower than analyst expectations of up to $6.4 a barrel.
 

Despite the segment’s poor showing, the overall Q2 showing is expected to boost near-term sentiment for the stock.