Covid-19 impact: Q4 shows digital, consumer are RIL’s new core businesses

Reliance Industries’ (RIL’s) consolidated performance for March 2020 quarter (Q4) may be disappointing, yet experts are bullish on the stock and believe that shareholders should subscribe to the company’s rights issue.

The challenges posed by demand disruption in core refining, petrochemicals and even retail business were evident in Q4 and are likely to continue, but strong growth in Jio Platforms, which comprises digital businesses, including telecom, along with deleveraging initiatives should create shareholder value in the long run.

In the refining and marketing business, per barrel gross refining margin (GRM) at $8.9 was slightly lower than $9.2 seen in December quarter, but higher than $8.2 a year-ago. The Street was expecting GRMs of upto $8 with benchmark Singapore GRM averaging $1.2 in Q4, the lowest in 17 years. RIL, however, accounted for inventory loss associated with a steep decline in crude prices, under exceptional items. Thus, standalone profits adjusting for this, were below analysts estimates.

“RIL has recorded non-cash inventory loss of Rs 4,250 crore, which if adjusted (like normally done for oil marketing companies) would result in inventory loss of $4.4 per barrel during Q4. Thus, the core GRM stands at $4.5,” analysts at Motilal Oswal Securities (MOSL), said.

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Petchem, now the third largest revenue and profit contributor, continued to see impact of lower realisations and supply disruptions, and its performance fell short of expectations with the segment’s profit down 22.4 per cent sequentially (42.8 per cent yoy) in Q4.

Organised retail business has been growing well, but Q4 revenues and profits were impacted by lockdown, and thus could only grow 4 per cent and 20 per cent year-on-year (largely led by grocery and essential product sales). Given the Covid-19 led disruption, it may take a while before it can rebound to earlier revenue and EBIT run-rate of 25 per cent and 49 per cent, respectively, seen during 2019-20.

The highlight of Q4 was the digital business (Jio Platforms), where revenue grew a strong 26.6 per cent and pre-tax profit by 127 per cent, on a yoy basis, as Jio’s subscriber base grew ahead of expectations to 387.5 million versus 370 million in Q3 and 306.7 million a year ago. Average revenue per user (ARPU) at Rs 130.6, up about two per cent sequentially, disappointed but better traction is expected as analysts such as Probal Sen at Centrum Broking expect the full impact of tariff hikes taken earlier to flow in coming quarters.

Interestingly, together, Jio and retail saw their share in RIL’s Ebitda increase to 38.6 per cent in Q4, up from 35.8 per cent in December quarter and 29.1 per cent in the year-ago period. And as these numbers rise further, the two are seen as RIL’s new core businesses.

Jio’s improving show should also support RIL’s overall valuation, at a time when outlook for other businesses remains challenging.

“We value RIL at Rs 1,618 per share (earlier Rs 1,589) based on sum-of-the-parts with equity values of Rs 358 (earlier Rs 353) for core business, Rs 500 (earlier Rs 450) for Reliance Retail and Rs 760 (earlier Rs 750) for Jio,” say analysts at MOSL.

Going ahead, Edelweiss Securities is more optimistic on telecom performance and pegs RIL’s FY21 Ebidta growth at 15 per cent.

Besides Jio, the balance sheet deleveraging is crucial. Vinod Nair, Head of Research at Geojit BNP Paribas, says the ongoing capital restructuring will boost longer term prospects for investors.

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RIL is raising Rs 1.04 trillion through its Facebook deal worth Rs 43,574 crore, investment by BP and announced the country’s largest rights issue of Rs 53,125 crore (its first in three decades). The right issue priced at Rs 1,257 per share is at 14.3 per cent discount to Thursday’s closing price of Rs 1,467. While the street was expecting a bigger discount, experts say the company’s due diligence on valuations it expects to garner from fresh investments in various businesses and recent Facebook deal must have influenced the pricing.

Promoters committing to 50 per cent and any unsubscribed rights issue instigates confidence. Deepak Jasani, head of retail research at HDFC Securities highlights that there are very few equity investment opportunities in current environment and investors need to pay only 25 per cent at time of subscription so can consider investing.