After less than explosive Q1, Reliance Industries stock to see no fireworks

Recent rally, soft outlook for O2C business may pull stock down

The stock of India’s most-valued listed company, Reliance Industries (RIL), could remain under pressure after lower-than-expected 2023–24 (FY24) April-June quarter (first quarter, or Q1) results, a run-up in share price in July, and downgrades by a clutch of brokerages.

RIL’s global depository receipts ended 5.86 per cent lower on the London Stock Exchange on Friday. While the stock has been on an uptrend since its March lows, gaining 25 per cent since, as much as half of those gains have come in just the past three weeks.

Analysts at Emkay Research, led by Sabri Hazarika, have downgraded the stock to ‘hold’ due to the recent stock run-up (off the back of the Jio Financial Services demerger) and range-bound business outlook.

What has weighed on Q1FY24 performance is the oil-to-chemicals (O2C) segment and a soft near-term outlook for the same.

Even as overall consolidated revenues were down 5 per cent year-on-year (YoY), the O2C business reported a 17 per cent decline in sales. The business accounted for 57 per cent of the consolidated revenues and 36 per cent of RIL’s operating profit in the quarter.

The revenue decline in the business was largely due to a sharp slide in crude oil prices (31 per cent YoY) and lower price realisations of downstream chemicals. Fuel cracks were at record levels in the year-ago quarter.

The company indicated that Chinese demand after the reopening of its economy was slower than expected, affecting demand. Further, producers and intermediaries continue to destock in view of slowdown fears and high-cost inventory, which depresses the prices of downstream products.

Analysts Rohit Nagraj and Jay Bharat Trivedi of Centrum Research expect the O2C business to remain soft in the near term with normalisation in fuel cracks and weak deltas due to a muted global demand environment. The brokerage continues to maintain a ‘buy’ rating.

The strong growth in consumer businesses was able to partly offset the impact of the dip in O2C business.

In the telecommunications (telecom) business, the company reported strong subscriber additions as well as an improvement in the average revenue per user (ARPU).

Net subscriber additions of 9.2 million in the quarter were better than brokerage estimates, which had pegged the same figure at about a million lower. The 7 per cent gains in subscribers YoY and 2 per cent quarter-on-quarter were, according to the company, a consequence of the increased presence and wider coverage of 4G and 5G networks, leading to higher adoption as well as retention.

Subscriber additions for the wireline (broadband) business have also been strong and are estimated to have risen by 25 per cent to 830,000 subscribers. The subscriber base in broadband is up 50 per cent YoY due to new tariff plans and better product offerings. What is positive is that most of the new acquisitions are in the postpaid segment, resulting in higher realisations.

ARPUs, which came in at Rs 180.5, were up 2.8 per cent and 1 per cent sequentially, compared with the year-ago quarter. The growth was due to a better subscriber mix and an increase in broadband subscribers. While subscriber growth is expected to continue, a tariff hike is a key trigger for the telecom business. ARPU growth may be underwhelming if prices are not hiked in the near term.

  

In the retail business, growth came in at 19 per cent, led by the expansion of its store network, which was up 16 per cent. Robust growth in digital commerce and new commerce, which account for 18 per cent of sales, and the consolidation of newly acquired businesses also aided the top line.

While the company added 555 new stores in the quarter, taking the total to 18,446, this was lower than the 800-plus run rate witnessed in the earlier quarters.

Footfall at 249 million was up 42 per cent, while the total area at 70.6 per cent was up 55 per cent YoY.

Within segments, it was grocery, with a growth rate of 55 per cent, that stood out. In addition to acquisitions, growth in the segment was led by promotions, a rise in the share of general merchandise, higher sales of JioMart, and new commerce channels.

The company indicated that it was looking at growing the share of non-food or general merchandise sales, which could aid in pushing up the operating profit margins.

In addition to higher efficiencies and scale, the growing share of the non-food business, which has been rising over the past few quarters (along with fashion and lifestyle), aided retail margins.

While growth in the fashion and lifestyle segment was at 15 per cent YoY, on a sequential basis, the uptick was led by jewellery and AJIO (end-of-season) promotions.

The growth in the electronics segment, at 14 per cent, was lower than the overall retail growth. A rising share of grocery (especially non-food businesses) at the cost of non-core connectivity businesses has led to a 3-5 per cent increase in operating profit as well as the retail valuation multiple of Emkay Research.