Soon after doubling its consolidated net profit to ₹13,227 crore in the March quarter, Reliance Industries Limited (RIL) is facing a few operational challenges in the current financial year (FY22), especially for Reliance Retail.
As several states in India get trampled under various strains of the Covid-19 virus, the oil-to-telecom behemoth is devising fresh strategies. The surging second wave of the pandemic has impacted Reliance Retail’s operations with only 44% of its stores open in April. In many cities that are facing local lockdowns, businesses, including digital commerce, are confined to essential items.
For RIL, the number of electronics, and fashion and lifestyle stores currently operational stands at 40%-50% of its network in April, substantially down from 94% in the March quarter. Grocery stores are operational at 80%-90% as against 95% reported in the fourth quarter, but operating at 50% efficiency. Footfalls have dropped to 35%-40% of pre-Covid-19 levels as against 88% in the last quarter, according to numbers given out by the company.
Across the country, supply chains of vendors are getting disrupted, and the company is re-establishing the network. In general, retailers will not be able to escape falling consumer sentiment and a substantial cutting down of non-essential purchases.
Analysts tracking the largest company in India are busy taking stock of the potential triggers and troubles, going forward. The pandemic-induced disruption, a delay in mobile telephony tariff hikes, and lower downstream margins could lead to an 8%-13% cut in EPS in the next two fiscals (FY22 and FY23), according to a report by the brokerage CLSA. “But we maintain our ₹2,250 target as we reset our retail target multiple in line with the rise in peer valuations. It is trading above recent deal benchmark valuation. This, along with a lack of significant triggers and potential earnings downgrades may limit near-term upside,” said the analysts at the brokerage.
They, however, remain positive on the long-term prospects of the company’s e-commerce and technology businesses. “But it lacks big triggers, and risk of consensus earnings downgrades limit near-term upsides,” they said in the report.
Despite more than doubling its net profit, the March quarter earnings have failed to enthuse the stock market. Most analysts had already expected the 100%-plus growth in net profit because of the low base. While net profit doubled on a year-on-year basis, the sequential improvement was 1%. Even other businesses saw a meagre recovery on a sequential quarter-on-quarter basis.
On May 3 and 4, the first two days of trading after the quarterly numbers were published, the stock reported a fall, and is currently hovering around ₹1,918 per share (on May 4), nearly 19% below its 52-week high of ₹2,367 reported on September 16, 2020.
Last week, RIL said in a statement that it has become India’s largest producer of medical-grade liquid oxygen from a single location. At its refinery-cum-petrochemicals complex in Jamnagar and other facilities, RIL now produces over 1,000 tonnes of the life-saving resource per day, accounting for over 11% of India’s total production. In April, RIL supplied over 15,000 tonnes of medical grade liquid oxygen free of cost, helping nearly 1.5 million patients, it said.
As the country had just emerged out of the disruptions created by the first wave of the pandemic, RIL reported a year-on-year 11% increase in its quarterly consolidated revenue from operations at ₹1,54,896 crore, for the fourth quarter. Jio Platforms—that includes telecom arm Reliance Jio, which had a customer base of 426.2 million as on March 31—reported a 47.5% growth in net profit at ₹3,508 crore on a 19% growth in consolidated revenue from operations at ₹18,278 crore.
Jio posted a total average revenue per customer (ARPU) of ₹138.2 per subscriber per month, down 8.5% quarter-on-quarter, lower-than-expected by analysts.
Reliance Retail reported a net profit of ₹2,247 crore in the March quarter on a revenue of ₹47,064 crore. The company said it opened 826 stores during the quarter under review.
During the financial year, RIL completed fundraising from selling minority stakes in Jio Platforms and Reliance Retail Ventures (RRVL) to global investors. It raised ₹1.52 lakh crore for Jio and ₹47,265 crore for RRVL.
Morgan Stanley analysts however believe that earnings torque from a multi-year upcycle in refining and petrochemicals, a recovery in telecom net addition, and a rise in gas production will lift investor confidence in RIL. “Asset monetisation and e-commerce ramp-up should also drive outperformance,” the brokerage said in a report.
“In April, RIL’s retail footfall fell to previous lockdown levels, and challenges were also seen in telecom. We incorporate the first half (of 2021-22) impact of Covid-19 on retail earnings, push out the telecom tariff increase to 2022-23, and lower 2021-22 and 2022-23 earnings by 5%-7%. A quicker gas production ramp-up and robust energy margins (up 15% quarter-to-date) will drive higher energy earnings and cushion retail/telecom challenges,” said Morgan Stanley.
Saudi Aramco is reportedly looking at a cash-and-stock deal with RIL. In 2019, the Indian major had announced a non-binding agreement with Aramco to sell a 20% stake at an enterprise value of $75 billion in its oil to chemicals (O2C) business while also agreeing to buy 0.5 million barrels per day (mbpd) of oil from the Saudi giant. Recently, Aramco had confirmed that it was continuing talks with RIL. The company has already hived off its O2C business and is awaiting regulatory approval. Aramco’s deal to acquire 20% stake in RIL’s energy business was delayed due to the pandemic and a persistent volatility in global crude oil prices, which left the West Asian country’s finances in shambles.
Analysts at Sharekhan said RIL’s adjusted consolidated Ebitda at ₹22,817 crore (up 3.6% year-on-year; up 9.7% quarter-on-quarter) was only 1% below their estimate of ₹23,077 crore. “This was because the better-than-expected performance of the retail business was offset by a slight miss in the O2C segment.” The retail segment posted a strong 33.3% quarter-on-quarter jump in the adjusted Ebitda to ₹3,083 crore (excluding ₹534 crore related to investment income) led by a robust 25% revenue growth.
“RIL’s efforts to carve out its O2C segment into a separate subsidiary would facilitate strategic partnership with global players and help unlock the value. Further, value unlocking in digital and retail (IPO is likely in next few years) would add value to shareholders’ returns in the coming years,” said the analysts in a report.
Motilal Oswal said RIL’s consumer business continues to show strong performance. “In Q4, RJio [Reliance Jio] reported revenue decline of 6% and Ebitda growth of just 2% quarter-on-quarter (in-line), on account of a 9% drop in ARPU, partly offset by a 4% addition in subscribers (15.4 million),” they said.
Edelweiss said for RJio, the March quarter was modest with a strong wave likely in the coming quarters. “RJio’s results were marginally below our estimate. The revenue dip was on account of removal of inter-operator charges (IUC) and lower number of days during the quarter. Subscriber addition was strong at 15.4 million (as against 5.2 million in Q3) taking total subscriber base to 426.2 million. Subscriber addition was significantly higher than our estimate of 7 million. However, we believe subscriber addition was aided by JioPhone subscribers, resulting in lower-than-expected ARPU,” it said.
In the fashion and lifestyle segment, RIL has strengthened its leadership position in several micro markets. The company has reported 2x revenue growth from small town stores. At present, more than 400 stores are integrated with JioMart, receiving daily orders of over 2x quarter-on-quarter. AJio, the online platform, reported 4x year-on-year growth in booking revenue and 2x growth in option count.
While RIL’s fundamentals remain strong, a lot will depend on how quickly India tackles the spread of the virus.