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Led by the energy vertical, the country’s largest listed firm by value, Reliance Industries (RIL), beat Street’s estimates for the second consecutive quarter. Even as the operating performance of the retail segment was somewhat below estimates and the telecommunications (telecom) business (Reliance Jio) was broadly in line, it was the 20 per cent sequential growth in the oil-to-chemicals (O2C) space that helped the company offset the miss in the consumer business. The energy vertical accounted for over half of its consolidated operating profit and about three-quarters of the bottom line.The sequential margin gains in the O2C business were on account of recovery in chemical margins and cheaper US ethane prices which declined 36 per cent, according to Morgan Stanley Research.
The Singapore gross refining margins improved sequentially to $8.2 per barrel in the October-December quarter, led by the opening up of the Chinese economy and rising mobility levels. There are, however, near-term worries as the Singapore benchmark is down sharply over the past fortnight — from $6 per barrel to $2.5 a barrel due to multiple demand-supply triggers.Spreads are down across products, with diesel being the worst hit. Antique Stock Broking, however, believes this is short-term in nature and should reverse as the demand-supply balance over the next two years continues to support a refining supercycle.
In the telecom business, the average revenue per user (ARPU) was flat and subscriber additions inched up 1.6 per cent sequentially.Analysts of Dolat Capital, led by Himanshu Shah, say Jio’s 2022-23 (FY23) fourth-quarter financials were marginally better, led by stable network costs and higher ARPU at Rs 179.
The brokerage highlights steep capital expenditure, muted free cash flows, and high debt as key challenges for Jio from a short- to medium-term perspective. The Street will keep an eye out on the adoption of 5G with the company aggressively improving its coverage and this translating into a higher ARPU. The increasing adoption of broadband services and attractive pricing should lead to the expansion of the customer base and increased per-user revenue.The retail business performance was assisted by a 41 per cent surge in footfall to a record 219 million and an 18.7 per cent increase in store count. Even as operating profit was up 33 per cent year-on-year (YoY) and margins gained 60 basis points, profit was up 2 per cent on a sequential basis, while margins were flat.
Regardless of higher growth, net profit was subdued at 13 per cent YoY and flat sequentially, given rising debt levels and interest costs that were up 2.5 per cent over the year-ago quarter, points out Nuvama Research.
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The brokerage has retained a ‘buy’ rating on the stock and expects the next leg of growth to be driven by the company’s new energy segment. The company has dropped the plan to merge the new energy/renewable energy with itself and will continue to run the business through its subsidiary Reliance New Energy.
Brokerages will also track the debt trajectory as consolidated gross debt has increased 18 per cent YoY to Rs 3.14 trillion, while net debt is up more than 3x to Rs 1.1 trillion over the same period, given the investments in retail, digital, and O2C segments.It has, however, indicated that it will maintain its net debt-to-operating profit ratio below 1. FY23 net debt-to-operating profit was at 0.7x.
While the listing of the consumer business will be a significant trigger for the stock, investors are also awaiting announcements related to the demerger of Jio Financial Services.Except for recent gains over the past month, the stock has been underperforming the benchmarks for most of last year. Over the past year, RIL has been down 16 per cent; the S&P BSE Sensex up 3 per cent and the Nifty50 gained 1.3 per cent.
BOB Capital Markets believes that the underperformance is due to the company’s expansion in the consumer goods (fast-moving consumer goods) space and financial services (Jio Financial Services), in addition to standalone 5G.
Analysts at Sharekhan believe that continued traction in the consumer-centric business will drive earnings growth for RIL and a likely initial public offering of Jio/Retail will remain a catalyst. The brokerage has a ‘buy’ rating on RIL.
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