The transition of Reliance Industries (RIL) to a new-age behemoth has turned out to be unexpectedly long. The economic recession and the pandemic have knocked the pace off its journey. The two growth engines of telecom and retail are pulling the heavyweight RIL with a renewed might but the traditional businesses have continued to huff and puff.

That fact is that both engines are capital-guzzling.

The two businesses run by Reliance Jio and Reliance Retail have contributed nearly 56% of RIL’s pre-tax profit (Ebitda) of ₹8,483 crore for the December quarter.

On January 22, the Mukesh Ambani-led oil-to-telecom giant reported a 12.5% rise in consolidated net profit to ₹13,101 crore, much higher than what analysts had anticipated. The revenues, however, plummeted 22% year-on-year to ₹1.23 lakh crore, primarily riding a sharp revenue fall at its once dominant oil-to-chemicals business.

RIL said in a statement that the outbreak of the Covid-19 pandemic globally and in India is causing significant disturbance and slowdown of economic activity.

The bottom line of RIL, which took an impairment of ₹15,691 crore in the quarter in its shale gas business in the U.S., could have been worse had a deferred tax benefit of ₹15,570 crore not been there. It helped RIL reduce the damage to a paltry ₹121 crore.

Some foreign brokerages such as Nomura and Credit Suisse said RIL’s performance was below their expectations. “RIL’s 3Q consolidated Ebitda was 3% below our estimates. The miss was largely on energy business with standalone Ebitda 12% below our estimates,” said Nomura in a note. Credit Suisse said the quarter was below expectation on lower retail sales, weak oil-to-chemicals (O2C) margins, and low subscriber addition in Jio. J.P. Morgan said Ebitda had a small miss across most segments, though continued 0% tax rate, and lower interest expenses drove an in-line reported net profit.

“Going forward, key catalysts are launch of affordable 4G smartphone which can aid towards subscriber addition; strategy to transition kirana stores buying from cash-and-carry to JioMart, which could expand its reach; update on O2C deal as oil prices recovered; launch of integrated digital health/education apps; and growth plans of financial services,” said Credit Suisse in a note.

The stock is on a receding tide ever since it hit a 52-week high of around ₹2,368 on the BSE on September 16, 2020. On January 25, the first trading day after the financial numbers were announced, the stock fell over 5% to close at ₹1,940, an 18% drop from its 52-week peak. The results were announced on January 22 (Friday) after market hours.

“From its 52-week low of ₹68 touched on March 23, the stock has gained 124% as on today (January 25). For a stock that reported such a growth, the drop over the last few months is irrelevant,” said Gaurav Dua, head, capital market strategy, Sharekhan.

Dua continues to be positive on RIL on account of the two growth drivers.

“RIL has invested a lot in telecom and retail. It may be close to half of the capital employed. Going forward, both sectors will need a lot more capital and of course, they are high-growth businesses,” he said.

Dua counts RIL’s immediate investments in 5G spectrum, technology, and equipment for 5G rollout, and the fibre to the home (FTTH) project. On the other hand, it will also need to invest in retail—primarily in JioMart, infrastructure, inventory, and customer acquisition, among others, he said.

During the October-December quarter, both sales and the bottom line of RIL’s telecom business have shown significant improvement. In a note, Goldman Sachs has predicted that the tariff hike is the next catalyst. “We forecast 18 million new Jio subscribers in the second half of 2020-21, but note this could have upside risks if Jio were to launch a low-priced smartphone in the near term. While both Jio and Bharti [Airtel] have continued to gain market share from Vodafone Idea, we see the tariff hike as the key catalyst for the business, especially in a decelerating subscriber adds environment.”

On the flip side, the retail business is still recuperating from the impact of the pandemic that nearly nuked the domestic economy. The business continued to suffer in the December quarter and revenues declined nearly 10% even on a sequential basis. Footfall had not yet recovered to pre-Covid-19 levels, RIL said in a statement. “Operating environment continued to remain challenging with sporadic Covid-related restrictions and local issues,” the company said. RIL had reopened 96% of its stores in the quarter, but only half of them were fully operational.

What is heartening is the fact that the grocery business and electronics stores have reported double-digit growth, while the fashion and lifestyle business delivered a strong rebound, surpassing pre-Covid-19 levels. Digital orders have seen a whopping 12 times year-on-year jump.

Sabri Hazarika, senior research analyst, Emkay Global Financial Services, said better-than-expected Jio ARPU (average revenue per user), higher-than-estimated interest cost decline and tax rate of 1% (as against 5% estimated) from petroleum segment restructuring were the drivers that helped beat their profit estimates for the third quarter.

“Jio revenue/Ebitda beat estimates by 2%-3% as ARPU rose 4% to ₹151, aided by FTTH. Net subscriber additions were weak at 5.2 million. Retail's adjusted Ebitda stood at ₹2,330 crore with ₹780 crore investment income. Revenue fell 19% year-on-year and 10% quarter-on-quarter with petro (retailing) moved to BP JV,” said Hazarika in a report.

A Mumbai-based consultant, who previously worked with RIL’s finance department, said the company is all set to race ahead of the competition in telecom, once 5G is out. “The work-from-home (WFH) concept has brought in huge benefits to telephony in the country and RIL enjoys a humongous advantage over its competition. In fact, Indian companies could go for a seamless WFH model thanks to the telephony infrastructure that was already built in the country. Going forward, only those telecom companies with deep pockets can survive the onslaught,” he said, requesting anonymity.

While telecom took a giant leap during the pandemic, retail and sale of petroleum products took a beating, he said.

Analysts believe that interest expenses should continue to come down as debt gets paid down from cash inflows from the recently-closed stake sales, while capex intensity remains low. Outstanding debt stood at ₹2,57,413 crore ($35.2 billion) as on December 31, 2020. Cash and cash equivalents were ₹2,20,524 crore ($30.2 billion), according to the company.

On August 12, 2019, at RIL’s 42nd AGM, Ambani had assured the shareholders that the company would turn net-debt free before March 31, 2021. The market is keenly watching if Ambani would strike a few more deals before March-end to bridge the existing gap.

Starting the third quarter, RIL has reorganised O2C as a separate business segment. The traditional cash cows of RIL, the refining and petrochemical arms, have been merged into the O2C segment.

Many analysts believe that the hive-off is a prelude to a potential stake sale. A couple of weeks ago, foreign brokerage Credit Suisse said in a note that Saudi Aramco may revive its interest in buying the 20% stake in RIL if global crude oil prices continue their upward trend.

Goldman Sachs said it expects rising online penetration with RIL’s entry into the online grocery space, which accounts for 60% of India's retail gross mechandise value (GMV) but has just 0.5% online penetration. The brokerage has estimated the online penetration to grow to 6.7% by 2024-25.

“We expect RIL to become the fastest-growing online retail platform in India with GMV of $35 billion by 2024-25, with a 31% market share,” the analysts said in the report.

Amid the ongoing recovery post the peak of the pandemic, Reliance Retail has significantly outperformed peers, with revenue continuing to grow despite lower footfall year-on-year. “We expect a strong inflection in retail revenues and forecast an overall core retail revenue of 40% over the next three years. The omni-channel push is supported by the prospects of creating India’s fastest growing Internet platform, through RIL’s existing dominance in telecom and offline retail, combined with the online traffic dominance of its partner Facebook,” they said in the report.

Analysts believe it’s a long journey, but there is light at the end of the tunnel.

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