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RIL Q3 results: With capex phase over, retail and digital to drive growth

RIL's consumer-facing businesses contribute bulk of EBITDA after slowdown in O2C

RELIANCE-KKR/STAKE

Over the last few years, Reliance has increased its petrochemicals manufacturing capacity, while also scaling up its retail business and rolling out its 4G telecom and high-speed fibre broadband internet across the country. Along the way, it raised billions from marquee investors like Facebook, Google and several private equity and sovereign wealth firms. With much of the capital expenditure now over, analysts expect Reliance to clock strong growth over the next few years. 

Goldman Sachs, for instance, expects RIL’s EBITDA (earnings before interest, taxes, depreciation and amortization) to double over the next four years. 

Importantly, this growth will be driven by the consumer-facing businesses, which now contribute to 51 per cent of the Mukesh Ambani-led company’s EBITDA, up from 37.4 per cent a year ago, thus offsetting the COVID-led slowdown in the traditionally strong oil refining business.

“After doubling EBITDA over the last four years, we believe RIL’s EBITDA can double again by FY25, as the consumer businesses (TMT (tech, media, telecom) and retail) appear to be on the cusp of a strong growth period (from deeper e-commerce penetration and monetisation opportunities),” Goldman Sachs analysts Nikhil Bhandari and Vinit Joshi said on Monday.

RIL late on Friday reported a consolidated net profit of Rs 13,101 crore in the December quarter, up 13 per cent from a year ago. Its revenue declined 19 per cent from a year ago but rose 7.4 per cent sequentially to Rs 137,829 crore. 

The company’s digital vertical Jio Platforms saw a 16 per cent rise in sequential net profit, while revenue was up 5 per cent. Reliance Retail’s revenue in the third quarter declined 10 per cent from the September quarter, as overall footfalls remained below pre-COVID levels and the petroleum retail business was transferred to RIL’s joint venture with BP. However, retail EBITDA was up 54 per cent. 

RIL has ended a major capex phase, wherein it incurred Rs 6.68 lakh crore of expenses between FY14-FY20, primarily to build its digital business and also for capacity expansion in its oil-to-chemicals (O2C) business. With major capex completed, capex is expected to moderate to a more normalised level of Rs 40,000-50,000 crore per annum, according to Dayanand Mittal and Vishnu KG, analysts at JM Financial Institutional Securities.

“RIL is entering a strong FCF (free cash flow) generation phase with major capex completed and expectation of strong 17-18 per cent earnings per share compounded annual growth rate over the next 3-5 years,” said the analysts.

In the retail business, RIL’s e-commerce platform JioMart has now expanded operations from delivering groceries to the fashion category, with plans for electronics to launched on the platform in the coming quarters.  

Analysts also point to stronger-than-expected growth in the high margin fashion division, where its online fashion platform Ajio.com has seen a strong rise in orders from a year ago. 

“With the online partnership with WhatsApp as part of the deal with Facebook, RIL has set sight on expanding their retail segment not only through the organised channel (online/offline) but also by penetrating the traditional retail channel (small kirana stores), which provides a huge opportunity ($900 billion) to the company. Currently, JioMart has been rolled out in 200 cities clocking 250,000 orders per day,” said Probal Sen, an analyst at Centrum Broking.

Elsewhere, in the telecom business, Jio’s average revenue per user rose 4 per cent to Rs 151 last quarter. At the same time, it also added 5.2 million subscribers, although this was lower than analysts expectations. 

RIL’s management reiterated that its 4G network is ready to be upgraded to 5G and many of its 5G technologies have already undergone field trials, noted the JM Financial analysts.

“As Jio’s growth slows, Jio Platforms, its holding company, is keen to replicate the success of wireless in other business streams. With aggressive plans and product launches in place, Jio Platforms is creating multiple monetisation opportunities in the digital space,” said Aliasgar Shakir and Swarnendu Bhushan, analysts at Motilal Oswal Financial Services. 

RIL has already completed raising Rs 152,056 crore in Jio Platforms and Rs 47,265 in Reliance Retail. 

Meanwhile, RIL is spinning-off of the oil-to-chemical business into a separate unit, and beginning third quarter, instead of reporting the financial performance of refining and petrochemicals business separately, it has clubbed them as O2C business unit.  The focus will be on reducing transportation fuels footprint in a phased manner and maximise profitability from downstream chemicals and materials, said RIL. It will also incubate new energy and new materials platforms with an eye on clean and green energy, plans of which were first announced its annual general meeting last year. 

The carving out of the O2C business into a separate entity could be a precursor to a stake sale, said the analysts at Goldman Sachs. 

“RIL has the highest complexity and industry leading refining to chemical integration driving a much higher margin capture versus peers in Asia,” they said.

On Monday, RIL shares closed down 5.4 per cent at Rs 1,939.70 on the BSE, while the wider Sensex was down 1.09 per cent at 48,347.59 levels.

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