Reliance Industries may reverse feeble stock showing on strong outlook

Major rerating, however, will depend on multiple triggers playing out

A strong performance in the October-December quarter (third quarter, or Q3) of 2021-22 (FY22), improving outlook across verticals, and marginal upward revision of estimates are expected to support the stock price of Reliance Industries (RIL).

The country’s most valued company beat Street estimates on the operating profit front, aided by retail, oil-to-chemicals (O2C), and upstream segments in Q3. The metric at just under Rs 30,000 crore was up 14 per cent sequentially and beat consensus estimates by over 4 per cent. This performance could get better. 

Says Pinakin Parekh of JPMorgan, “Given the continued strength in refining, higher gas prices, and telecommunication (telecom) tariff hikes, we expect operating earnings to further improve from here.”

This improved outlook also means that the downside from the current levels will be limited, even as most brokerages have marginally tweaked or stuck to their estimates. 

Jefferies India has kept the FY22 earnings estimates unchanged and expects consolidated adjusted earnings per share (EPS) to grow 22 per cent over the FY22-24 period, led by 33 per cent annual growth in retail and 22 per cent growth in telecom verticals.

Analysts, led by Bhaskar Chakraborty, at the brokerage believe that the stock underperformance (5 per cent lower returns, compared to the Nifty in calendar year 2021) is expected to reverse and reiterate their 'buy' stance with target price of Rs 2,950, with an upside of 20 per cent from the current levels.

While an improved outlook is normally followed by sharp upgrades and higher target prices, the RIL stock may not see a rerating since the company will have to play catch-up with high expectations built into estimates.

“Given the elevated 2022-23 (FY23) estimates, with an implied quarterly operating profit run rate at Rs 34,500 crore as compared to the Q3FY22 levels of Rs 29,700 crore, an upgrade cycle is still some time away,” says Parekh.

The brokerage has maintained its FY22-23 estimates for now, baking in stronger gross refining margins, steady petrochemicals (petchem), and better performance in the telecom and retail segments.

While the potential and upsides from these businesses are well acknowledged, what could lead to change in growth and earnings assumption is the progress on the new energy business front. The company has entered into a slew of partnerships/acquisitions in solar and green energy space and is setting up gigafactories in Jamnagar (Gujarat). 

While progress on this or other triggers, such as listing of retail and telecom businesses, as well as new investors in the O2C vertical, could take time, the near-term gains could be driven by the company’s ability to sustain the Q3 outperformance, especially in retail and O2C, while arresting the subscriber churn in the telecom segment. 

The retail business was a standout performer, with sequential revenues growing 27 per cent sequentially to Rs 57,700 crore — a record — on a low base.

Overall growth was aided by stores getting back to normal and 837 store additions in the quarter, with festival-related demand driving footfall at 95-per cent levels.

The fashion and lifestyle segment posted its highest-ever quarterly revenue, which was twice the year-ago number.

In addition to operating leverage, a favourable mix drove profitability. While operating profit was 31 per cent higher sequentially, margins expanded 90 basis points to 7 per cent. 

While the company is looking at expanding its presence across formats and regions, analysts believe the disruption caused by the new variant of the novel coronavirus could impact its performance in the current quarter.

The O2C business saw mixed performance, with improvement in the refining segment, while the petchem segment lagged.

Refining margins improved sequentially on the back of growth in global oil demand in the December quarter and limited Chinese exports.

Petchem volumes fell on weak domestic (polymer/polyester), as well as Chinese New Year demand. While refining margins are expected to remain firm, aided by multiple supply triggers, the petchem profitability could be under pressure in the first half of the current year.

The key disappointment in the quarter was in the telecom segment, with subscriber churn continuing for the second consecutive quarter. After a 11-million subscriber loss in the July-September quarter, the country’s largest telecom services players lost 8.5 million subscribers in the December quarter due to SIM consolidation.

Overall revenues (as well as average revenue per user, or ARPU), however, saw an increase, given the increase in tariff, subscriber losses largely in the low-ARPU category, and higher additions in fixed broadband business.

While the full impact of higher tariffs will flow through in the current and next quarter and highlights Reliance Jio’s focus on ARPU-led growth, given growth expectations, investors will keep an eye out for subscriber churn. 

While the consensus EPS estimates are lower at 16 per cent, some brokerages expect an EPS growth of 20 per cent over FY22-24. Given the limited downsides, investors can consider the stock trading at 23x its FY23 earnings estimates on dips.