Reliance Industries Results: Analysts' Take On What Will Aid RIL's Growth After Q1

Reliance Industries Ltd. first-quarter profit fell sequentially and over a year earlier as demand for oil-to-chemicals and retail units fell during the second wave of the pandemic. Analysts see key business segments including oil and retail units to support growth from now on.

Q1 Highlights

• Net profit fell 7% sequentially and year-on-year.

• Total income declined 6% sequentially even as the other income jumped 30% sequentially.

• Retail segment sales fell 18% sequentially.

• Consolidated EBITDA rose 3.6% sequentially.

Shares of Reliance Industries opened 0.2% higher on Monday but pared gains to trade as much as 0.8% lower as of 1 p.m.

Out of 36 analysts tracking the stock, 23 suggest a ‘buy’, 8 recommend ‘hold’, and five have a ‘sell’ rating, according to Bloomberg data. The average of 12-month target price estimates imply an upside 5.4%.

Here’s what brokerages have to say about RIL’s first-quarter results:

Emkay

• Retained ‘hold’ with a target price of Rs 2,340—a potential upside of 11.2%.

• Raised FY22-24 earnings per share estimate by 3-4%.

• O2C Ebitda driven by better transport fuels, petrochemical margins, and sourcing of cheaper domestic gas.

• The contribution of digital and new commerce rose to 20% of revenues from 4% a year ago.

• Ajio saw fourfold growth in monthly active users and order volumes, while JioMart scaled up further with 25% sequential growth.

• Jio’s core subscriber additions of 1.38 crore compared to an average of 92 lakhs in the last four quarters was still strong considering the lockdowns.

• The management is constructive on the O2C margin outlook with improving mobility, healthy domestic petchem demand, and container shortage.

• Upstream earnings contribution expected to improve with higher output and likely increase in gas prices (like to rise 50-60% in the second half of FY22).

• Management expects pressure on retail easing with operating store hours at 38% in June (25% in May) and further opening in July.

• 700 new stores in the pipeline.

ICICI Securities

• Retained ‘hold’ but cut target price marginally to Rs 2,017—implying a downside of 4.2%.

• Cut FY22 earnings per share estimate by 1%. Reduced retail and O2C Ebitda estimate for FY22 by 25% and 6%, respectively but raised it for E&P by 120%.

• Recurring EPS up 48% over a year earlier, driven by an increase in operating income across segments and a halving of interest cost.

• Petrochemicals’ Ebitda was at an all-time high but GRMs remain weak.

• GRM weakness, a fall in petrochemical margin from the peak and a potential third Covid wave delaying retail recovery may mean more downside to FY22 EPS estimate.

• Jio’s network cost rose 3.8% sequentially and 14.3% on an annual basis to Rs 6,000 crore, which is expected to rise from higher payments to tower and fibre InVITs.

• Jio company needs tariff hikes to maintain earnings growth momentum.

Prabhudas Lilladher

• ‘Buy’ with a target price of Rs 2,416—a potential upside of 14.8%.

• Cut FY22 earnings estimates by 4%.

• O2C segment benefitted from higher spreads (polymer margins up 30-40% from pre Covid levels, albeit lower sequentially) and cost optimisation.

• Jio Platforms reported a stable performance with Ebitda for Q1 rising 4% QoQ.

• Net subscriber addition was at 1.43 crore (overall 44 crore subscribers).

• Expect sharp growth for digital services business, as data demand accelerates and pricing improves.

• Retail profitability was hit by lockdown restrictions as footfalls were at 46%. Tie-ups with Facebook and Just Dial likely to accelerate RIL’s connectivity with local kiranas and small enterprises, driving growth.

• RIL is well-positioned to incubate new business and pursue inorganic opportunities.

Motilal Oswal

• Reiterated ‘buy’ with a target price of Rs 2,485, a likely upside of 18%.

• The second Covid wave had a lesser impact compared with Q1FY21 on the retail segment cushioned by the e-commerce business, swift recovery, and lesser intensity of the lockdown

• O2C segment witnessed robust operating performance helped by operating efficiencies and energy cost optimisation.

• The company spend Rs 46,000 crore on capex in Q1.

Credit Suisse

• Rate ‘neutral’.

• Cut FY22/23 EPS estimates by 3%/1% due to lower retail sales.

• Increase target price by 5% to Rs 2,020 (a downside potential of 4%) due to improved valuation of the O2C segment to $67.5 billion (from $60 billion).

• Strong subscriber addition by Jio and a sharp jump in digital and new commerce revenues were key highlights of Q1FY22.

• The marketplace model should help JioMart onboard third-party sellers, which can significantly expand the product assortment on JioMart.

• The fashion and lifestyle segment has expanded its coverage of merchant partnerships to 2,380 cities (from 2,265 cities in 4Q FY21); and for grocery, the number of kirana partners increased 33% year-on-year.

• Weakness in core retail sales was offset by strong petrochemical margins.

Goldman Sachs

• Rate ‘buy’.

• Lower FY22 EPS estimate by 6% and marginally reduced target price to Rs 2,435, a potential upside of 15.7%.

• Retail margins were weaker due to a larger sequential decline in the high-margin fashion segment

• With the imminent launch of a smartphone in partnership with Google, Jio’s subscriber momentum is expected to stay robust.

• Jio also witnessed strong traction for its fibre to home business, with more than 30 lakh subscribers as of June.

• O2C earnings were weaker than expectations while the E&P segment was ahead of expectations. Expect refining and E&P to drive the next leg of growth for the energy segment.

• Expect RIL to continue to scale up both in digital offerings via more category launches and in their offline presence through accelerated store rollouts.

Morgan Stanley

• Rate ‘overweight’ with a price target of Rs 2,269, a potential upside of 7.8%.

• Estimate 36% annualised growth in EPS for FY21-23.

• Rising chemical prices, multi-year high gasoline margins, and recovery in demand provides multiple triggers.

• The positive triggers supporting an earnings upgrade cycle are currently getting masked by Covid-related challenges in the near term.

• Broadband subscribers are picking up, wireless subscriber net additions have outperformed despite Covid challenges.

• Retail has challenges, store additions are still strong and online commerce has gained traction.

• Jio-Google partnership shall enable the use of 5G solutions for RIL's retail, health, JioMart, and music platform operations.

Nomura

• Rate ‘buy’ with a target price of Rs 2,400, a likely upside of 14%.

• The impact of the second covid wave was offset by better energy business and Jio.

• The oil to chemicals segment was relatively resilient. KG-basin production further moved up to average 16.6 million metric standard cubic meters in Q1 (vs 7.1 mmscmd in Q4), and reached over 18 mmscmd ahead of schedule (according to RIL).

• E&P earnings are likely to jump due to a 55-60% increase in gas prices from October, and a ramp-up in output.

• Jio’s outlook remained strong with continued market share gains, FTTH/enterprise ramp-up, strategic tie-ups, in-house 5G capabilities, increased spectrum footprint, and digital ecosystem rollout.

• After the pandemic impact in Q1, most segments are expected to improve.

• O2C is likely to benefit from gradually rising refining margins and domestic demand revival.

• Retail to benefit from the revival of footfalls, new store openings, and a rising share of new commerce.