Subdued Q3, few near term triggers to keep RIL stock under pressure

Debt reduction, gains from digital priced in

Lower-than-expected December quarter performance, lack of near term triggers and downgrades by some brokerages could keep the Reliance Industries stock under pressure. Though the stock is up 11 per cent from its lows in early November, it is still trailing benchmarks by a significant margin; the BSE Sensex is up 21 per cent during this period. 

The company’s consolidated revenues and operating profit were 6-16 per cent lower than analyst estimates largely due to the pressure in the standalone or the oil and gas business and weak retail revenues. 

The company has stopped reporting gross refining margins, and has clubbed refining and petrochemicals under the oil-to-chemical segment. Segment operating profit was down 31 per cent y-o-y to Rs 9,150 crore with sequential gains at 9 per cent. BOBCAPS Research has downgraded its FY22-FY23 earnings by 10 per cent. 

Says Rohit Ahuja of the firm, “We need to see earnings traction to justify the recent surge in stock price as the rally factors in positives from debt reduction. O2C earnings growth remains elusive in the current pandemic-led uncertainty.”

While the cyclical business recovery would be gradual and dependent on economic growth as well as demand from user industries, analysts are positive on the consumer-led businesses. 

“Given the slightly subdued results, the stock could underperform in the near term but over the medium to long term there is growth visibility led by retail, telecom and digital (internet driven businesses) which should   support the stock prices,” according to Pankaj Murarka of Renaissance Investment Managers.

Though Reliance Jio’s subscriber addition has slowed, the jump in average revenue per user by 4 per cent to Rs 151 on a sequential basis came in better than the street’s Rs 148 estimate. The rise in per user revenues was on the back of improving user mix and increasing data volumes. In addition to traction in the fiber broadband segment and launch of low cost phone, the key near term trigger is price hikes which are expected to be taken post the telecom auction in March. Analysts believe the segment could generate a 15-20 per cent revenue/profit growth on an annual basis led by new users, data volumes and price hikes. Its share of RIL’s consolidated operating profit, currently at 34 per cent as compared to 23 per cent a year ago will continue to rise given the estimated growth rates.  

The retail segment was impacted by Covid related restrictions with revenues down 19 per cent y-o-y. The transfer of petro retail dealership and the conversion of Reliance Market stores to fulfillment centres too impacted the top line. Analysts at Motilal Oswal Research believe that core retail segment revenues have declined 30 per cent after excluding the connectivity business and this is weaker than the June quarter’s 18 per cent revenue decline. The margin improvement however has been better than expected due to improving efficiences and strong digital sales especially in the higher margin fashion and lifestyle segment. Analysts believe that its omnichannel strategy will help it tap the rising share of digital segment while ongoing expansion in the physical stores will see traction as the impact of the pandemic wanes. Share of retail segment in operating profit has improved marginally to 12 per cent from 10 per cent in the year ago quarter.