Valuation, Jio subscribers miss cap upsides for Reliance Industries

With low visibility in tariff hikes, strategic sale in oil-to-chemical biz a near-term trigger

The disappointment in the telecom vertical could be a near-term overhang for Reliance Industries (RIL), India’s largest company by market capitalisation. The miss on the subscriber addition front in the September quarter has led to a downward revision of up to 2.5 per cent in the operating profit and net profit estimates by brokerages for the current and the next financial years. The valuation could be the other factor capping near-term gains. 

The stock has gained 29 per cent since the start of August — about twice that of the Sensex’s returns over the same period. While its investments in clean energy solutions may be a long-term growth driver, the price run-up and the valuation at 25 times its FY23 earnings investments factor in near-term upsides in each of its key verticals. 

Pinakin Parekh of JPMorgan says: “As key segments (oil to chemicals or O2C, retail and Jio) are reflecting the premium valuation, in our view, further rerating will have to come from a higher renewables option value.”

The immediate trigger for the stock on Monday could be the September quarter performance, which was broadly in line barring the telecom segment. For the first time since its launch five years ago, Reliance Jio reported a decline in net subscriber additions. Despite a seven-quarter high gross addition of 36 million subscribers to its network, 47 million customers left the telecom service provider, resulting in a net decline of 11 million customers. 

The company indicated that the churn was largely due to low-end customers who have recharged after the second wave — which reflected in the September quarter, given the company’s 90-day subscriber recognition policy. Analysts led by Dayanand Mittal of JM Financial believe that part of the impact may be due to JioPhone users moving out after their three-year lock-in, as July-September 2018 had seen the launch of JioPhone and several flash sales. They also highlight the fact that the healthy seven million net additions in the first two months of the quarter (July & August) means that the September loss would be at over 17 million customers. 

There are twin implications of this: The first is a risk of more JioPhone users being lost due to the above; the other is a delay in tariff hikes. Analysts at Jefferies Equities Research says: “We believe tariff hikes in the near term are unlikely given Jio's increased focus on subscriber additions and the imminent launch of JioPhone Next.” Given the company’s focus on ramping up customer acquisitions and JioPhone Next launch, the December quarter subscriber numbers will be critical for the market. Jio has a target of hitting the 500 million customer-mark with the number at the end of September quarter being 429.5 million, as compared to 440.6 million at the end of June quarter.

Positive on the operational metrics comprises the 3.8 per cent increase in the average revenue per user and the 13 per cent increase in the overall data on a sequential basis. Over the year-ago period, data volumes in the network are up 50 per cent; metrics for per consumer data and voice consumption, too, remain robust. The digital services growth trajectory is an important trigger as the segment profit accounts for 35 per cent of the consolidated operating profit. 

The retail segment, however, saw a sharp recovery as the situation eased on the Covid front with 89 per cent of the stores remaining operational, as compared to 61 per cent in the June quarter. With restrictions easing, footfall has seen a rise, reaching 78 per cent of the pre-Covid level in the quarter as compared to 46 per cent in Q1FY22. What augurs well for the retail business is the update from the management that footfall in the festive season is at 90 per cent of the pre-Covid level as vaccinations gain pace and the rate of infections slows down. 

The improving situation reflected in core retail growth (excluding petro retail) registering a 16 per cent YoY rise in the quarter, with fashion and retail segment sales doubling over the year-ago period and registering their highest ever quarterly revenue. The margin, too, saw an uptick of 160 basis points to 6.4 per cent with improving product mix (discretionary) and operating leverage aiding the gains. 

The overall retail revenue growth is expected to continue as expansions gather pace with most store additions (813) in nearly three years. A slew of acquisitions and tie-ups (Ritu Kumar, Manish Malhotra, Portico, Milkbasket, and 7-Eleven) made to fill the white spaces in its portfolio, expand its supply chain and improve technology could be other growth drivers. 

The oil-to-chemical business results were in line with Street expectations. Better fuel and petchem demand led to a strong revenue performance while recovery in the downstream margin aided the operating profit as compared to the year-ago quarter.  What offset some of the margin gains on a sequential basis were lower polymer and polyester margins due to higher feedstock prices. Analysts at JPMorgan Research say: “Given the sharp rally in diesel and jet fuel cracks (refining margins), O2C should further improve in the second half of FY22, driven by refining.” The jet fuel refining margin hit the 18-month high recently.

With the near-term telecom price hikes ruled out, the Street will likely await the completion of stake sale in O2C with higher valuations acting as a trigger.