O2C to drive RIL’s cash flow as retail, FMCG and 5G scale up

Analysts expect better cash flow growth at Reliance Industries (RIL) even as its share price languishes at around 17% discount to its peak price. Research firms say that the Mukesh Ambani firm has the potential for such growth, considering its investments in 5G, retail, FMCG, financial services, petrochemicals and renewable energy. RIL will announce Q4 results on April 21.

According to UBS, RIL's fundamentals remain strong with future growth drivers including 5G and FWA (fixed wireless access) for digital business, new commerce and FMCG for Retail, and improving petrochemical integration for oil-to-chemicals (O2C) business. JP Morgan also expects a healthy earnings environment for RIL in FY24, which should allow the company to invest across businesses like telecom, retail, petrochemicals and new energy.

JP Morgan forecasts consolidated Q4 EBITDA for RIL at Rs 37,130 crore, up 5% quarter-on-quarter (QoQ), and net profit after minority interest at Rs 16,450 crore, up 4%. UBS expects RIL to report Q4 FY23 EBITDA of Rs 37,800 crore, up 21% year-on-year (YoY) and 7% QoQ, with earnings expansion across the energy and consumer businesses. It estimates the consolidated PAT at Rs 16,800crore, up 4% YoY and 7% QoQ. 

"We believe the QoQ improvement would be driven mainly by O2C, with petrochemicals seeing some improvement from very weak levels seen in Q3," JPMorgan said in a report. Strong naphtha-ethane spreads, improving para-xylene prices and higher exploration and production (E&P) volumes with steady gross refining margin (GRM) should drive further improvement in RIL’s energy businesses' EBITDA in the first half of FY24, while the consumer businesses should remain sluggish, although it should improve in the second half of FY24, said the equity research firm.

"O2C earnings should recover QoQ, led by strong refining margins, lower fuel export taxes and improving petrochemical spreads. The performance of Jio and Reliance Retail should remain strong, leading to a share of consumer business in segment EBITDA of 46%," said UBS. 

Mukesh Ambani, Chairman and Managing Director of RIL had announced investment plans of ₹3.5 lakh crore--- including ₹2 lakh crore on 5G and ₹75,000 crore in expanding O2C capacities across value chains and ₹75,000 crore in renewable energy business--- at the annual general meeting of the company last year.

Another research firm, Jefferies expects Jio's revenue to be sequentially flat or up by 10%YoY in 4Q. “We expect subscriber additions to be stable at 5.3 million in line with the previous quarter and expect a 1% sequential decline in average revenue per user (ARPU) due to a lower number of days. We expect Ebitda margins to be broadly stable QoQ as the benefit of lower spectrum usage charge was completely realised in Q3,” it added.

CLSA said Reliance Jio has extended its 5G reach to 406 cities, while its rival Bharti Airtel has rolled out 5G services in 500 cities. Jio and Bharti target pan-Indian 5G coverage by December 2023 and March 2024, respectively. Since 5G launch in October 2022, Indian 5G subscribers have reportedly reached 50 million, which is 5% of global 5G subscription and 6% of Indian mobile data subscription. Vodafone Idea’s delayed 5G rollout is also triggering further market share consolidation for Jio and Bharti, said CLSA.

In India, neither Jio nor Airtel have differential tariffs for 4G and 5G services. Both offer 5G services to 4G prepaid subscribers with data plans worth over ₹239 if they have a 5G compatible device and are in a 5G network area. Both operators currently offer unlimited 5G data to customers to encourage them to experience the 5G networks.

JP Morgan forecasts a low single-digit EBITDA increase for Jio, given flattish ARPUs. “While the overall consumer environment is soft, we believe Reliance Retail should benefit from floor space additions and we forecast a 7% QoQ increase in EBITDA. Overall, the consumer businesses should remain soft in 1HFY24, but should improve in 2H,” it added.

Reliance Retail recently entered into newer segments and launched beauty website, while opening physical store. It also launched a slew of FMCG products. Reliance Retail announced the launch of its omni-channel beauty retail platform ‘Tira’ and also opened its store in Mumbai.