(Source: Bloomberg)

The Big Overhang On Reliance Industries’ Stock Price 

Billionaire Mukesh Ambani’s flagship company Reliance Industries once again managed to beat street estimates with its second quarter earnings. This was the fifth consecutive quarter where the country’s largest private oil refiner outdid analysts’ forecasts on net profit.

The company on a standalone basis, clocked a net profit of Rs 7,704 crore, courtesy a robust petrochemical business. This was much higher than the Rs 7,239 crore estimated by a Bloomberg poll of analysts.

The profit surprise came in because of the incremental 3 percent rise in EBIT for the petrochemicals business, and the in-line gross refining margins.
Sanjeev Panda, Oil & Gas Analyst, Sharekhan
The graph represents the % amount by which RIL’s profit beat estimates each quarter
The graph represents the % amount by which RIL’s profit beat estimates each quarter

This time RIL’s revenue also beat analyst estimates for the first time in eleven quarters. It reported a revenue of Rs 64,340 crore, beating the Bloomberg consensus estimate by 11 percent.

The graph represents the % amount by which RIL’s revenue beat estimates each quarter
The graph represents the % amount by which RIL’s revenue beat estimates each quarter

Second Quarter Star

The petrochemicals business helped RIL boost its profit to a record high. Revenue in this segment grew 8 percent sequentially to Rs 22,422 crore. It also recorded the highest-ever earnings before interest and tax (EBIT) of Rs 3,417 crore.

The growth was led by higher volumes and strong margins in polymers. The demand for polyesters and polymers grew 14 percent and 10 percent year-on-year respectively. But the long-term outlook remain uncertain as this is a global commodity, analysts said.

The petrochemicals business depends on demand and supply and on input cost dynamics. The current trend seems to be favourable, but being global commodity it is difficult to predict on a long-term basis.
Sanjeev Panda, Oil & Gas Analyst, Sharekhan

The Reliance Jio Overhang

RIL’s newest venture, Reliance Jio, has more than 1.6 crore subscribers, and as part of its promotional offer, it’s providing all services free of cost till December 31. On Thursday the company said it may extend free services beyond this period for those subscribers who ‘not able to get adequate experience of seamless connectivity’ so far.

Reliance Jio has repeatedly said that its customers are experiencing massive call failures as incumbent players refuse to share sufficient points of interconnection.

Deutsche Bank expects the delay in its commercial launch to affect the stock price, the brokerage said in a report post earnings.

Any delay in the planned launch of its telecom venture or a lower revenue ramp-up could be a key risk to the stock price.
Deutsche Bank Report

Reliance plans to invest an additional Rs 1 lakh crore in the telecom business over the next four years through internal accruals. This will be an additional burden on the stock, Motilal Oswal said its post earnings report.

RIL’s capital allocation in recent years had been skewed towards non-core businesses (telecom) to ring-fence its earnings from cyclical businesses. With telecom launch round the corner, RIL stock is entering into a critical juncture as success of telecom venture will drive the stock performance.
Motilal Oswal Report

The true test for Reliance Jio will be when it starts charging for its services, analysts added.

The prices that they have offered is quite attractive. Now it will depend on other service providers. If they cut their prices, then it could be difficult for Jio to achieve its targets. As of now it is very difficult to predict anything. In the initial years, it could be a drag on profits. How many customers retain their services once they start billing will be the key thing to watch out for.
Sanjeev Panda, Oil & Gas Analyst, Sharekhan

Also Read: Reliance Jio Services May Be Free For Longer

Following the earnings announcement, equity research firms Edelweiss, HDFC Securities, Prabhudas Lilladher and Sharekhan revised their target prices upwards while Deutsche Bank and Morgan Stanley maintained target prices.

HSBC Global Research has marginally revised its target price to Rs 1,072 from Rs 1,042 but has maintained its ‘hold’ rating on the stock. Motilal Oswal maintained its ‘neutral’ rating and reduced its target price.

The Reliance Industries stock fell 2.15 percent on Friday. The stock has ended lower six out of the last seven times after earnings are leased post market hours, BloombergQuint’s analysis shows.

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