Jio fails to fire but retail & refining power RIL

Indeed, RIL’s December quarter (Q3FY22) results were marked by a sharp rebound in retail business. Store operations normalized with footfall at 95% of pre-covid levels. Festive season sales and record store sales boosted the segment’s revenues. Grocery, consumer electronics, apparel and footwear categories saw robust demand. “A low base coupled with increased mobility helped as Reliance Retail’s core revenues more than doubled during Q3, with two-year CAGR (compound annual growth rate) at about 19%,” analysts at Jefferies India Pvt. Ltd wrote in a 22 January report.

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RIL’s consolidated Ebitda in Q3 was 6% ahead of Jefferies’ estimate, helped by a large beat of 11% in the retail business. Ebitda stands for earnings before interest, taxes, depreciation, and amortization and excludes other income. Note that RIL’s Ebitda in Q3 rose 14% sequentially to ₹29,706 crore. The figure topped the ₹28,380 crore estimate in a Bloomberg poll of analysts.

Meanwhile, the fall in subscriber additions in Reliance Jio, is a sore point. In Q3, owing to SIM consolidation, Jio’s net subscriber loss stood at 8.5 million vis-à-vis 11.1 million in Q2. As such, continuous subscriber loss is discouraging.

Jefferies said, “Jio’s underwhelming subscriber numbers could point to lower-than-expected subscriber additions for Bharti (Airtel) in Q3.” On the brighter side, Jio’s average revenue per user (Arpu) rose 8% year-on-year on a like-for-like basis to ₹151.6. “The recent tariff hikes amid subscriber churn suggests that Jio’s focus is steadily shifting towards Arpu-led growth, which bodes well for overall pricing environment,” Jefferies’ analysts said.

RIL’s highest revenue contributing business, oil to chemicals (O2C), saw robust growth last quarter, although the segment’s performance is almost in line with expectations. Within O2C, the refining segment did well, but petrochemicals margins stayed subdued. Refining environment improved, with benchmark Singapore gross refining margin rising to $6.1/barrel in Q3 from $3.8/barrel in Q2. The oil and gas E&P (exploration & production) business also performed well, led by a significant revival in KG D6 production and higher price realizations.

With better demand, analysts expect refining margins to remain strong in the near-to-medium term. Even so, the fortunes of the RIL stock are closely tied to its consumer businesses, retail, and telecom. Pinakin Parekh, an analyst at JP Morgan India Pvt. Ltd wrote in his report on 22 January, “O2C + E&P account for only 30% of our price target and hence, for the stock price, the key drivers would remain the high multiple businesses such as retail (valued at 43x FY23 EV/Ebitda), Jio (valued at about 13x FY23 EV/Ebitda and a sharp premium to peers) and new energy ($20bn equity option value).” EV is enterprise value. JP Morgan’s price target for RIL’s stock is ₹2,575 per share. On Friday, RIL closed at ₹2,477.85 on NSE.

Nitin Tiwari, an analyst at Yes Securities Ltd, said RIL’s huge investment plans in renewable energy would transform its energy business vertical and improve earnings prospects over time.

That said, the outperformance in RIL’s shares over the past six months suggests investors have factored in an adequate part of the optimism. In the near term, intermittent disruptions owing to the third covid wave may weigh on the retail business. Further, Jio subscriber additions need to be monitored.

ujjval.j@livemint.com