Brokerages Upbeat On Reliance Industries’ Debt Reduction Plans

The decline in Reliance Industries Ltd.’s consolidated net profit in the March-ended quarter is the worst fall the company has witnessed in atleast 24 successive quarters.

Impacted by the Covid-19 pandemic-led lockdown and economic decline, as well as the dramatic fall in crude prices, India’s most valued company reported an 18 percent decline in operating profit (EBIT) of the refining business, a 13 percent decline in the petrochemical business and a 13.7 percent fall in the retail business. These declines are over the third quarter of fiscal year 2019-20.

Only the telecom business reported a sequential growth in its operating profit, led by tariff hikes, subscriber additions and higher usage. These are likely to continue to boost earnings for the company’s second largest business.

RIL also announced a Rs 53,125 crore rights issue to raise capital in an effort to reduce debt. Combined with the proceeds from the Facebook investment in Jio Platforms, the funds will help reduce RIL’s net debt by 60 percent over the previous year. Chairman Mukesh Ambani had last year said he intends to make the company net debt free by March 2021.

Here’s how various brokerages viewed the company’s Q4 FY20 earnings.

Edelweiss

Maintains ‘Buy’ and hikes target price to Rs 1,645 per share from the earlier Rs 1,573.

• Expects earnings to remain steady with consolidated EBITDA ex-inventory losses in line.
• Gross Refining Margin slid to $4.5 per bbl, if accounted for the exceptional inventory loss.
• The company’s goal of zero net debt is in sight; it is also free cash flow positive.

Axis Capital

Maintains ‘Buy’and hikes target price to Rs 1,780 from Rs 1,725.

• The refining business performance was better, petrochemical business was softer than expected.
• Reliance’s telecom business Jio and its retail business delivered steady revenue/margin performance.
• The stronger operating margin has yielded better cash generation and the strategic stake sales will accelerate de-leveraging.

BofA Securities

Maintains ‘Buy’ with target price of Rs 1,700 per share.

• While Q4 was in-line with expectations, it was a softer performance quarter-on-quarter due to Covid-19.
• The rights offer and stake sale commentary overshadow Q4 results.

Bernstein

Maintains ‘Outperform’and hikes target price to Rs 1,720 from Rs 1,530.

• Downstream margins weakened in Q4 FY20 due to oversupply.
• Jio continued strong growth; retail business was resilient in the quarter.
• Cut FY21 and FY22 earnings per share estimates by 9 percent and 1 percent respectively; expect to see net cash position by FY22.

Prabhudas Lilladher

Maintains ‘Buy’ but cuts target price to Rs 1,601 from Rs 1,609.

• Resilient performance in hydrocarbons business; retail and Jio growth continues unabated.
• Focus on asset monetisation and fund raising to keep company in good stead in a challenging global economy.
• Well placed to capitalise on growth opportunities in the digital and retail space.

IDBI Capital

Downgrades to ‘Hold’ from ‘Buy’and cuts target price to Rs 1,528 from Rs 1,586.

• Refinery and Jio businesses shine; Petrochemicals business disappoints.
• Near-term headwinds persist. EPS estimates cut by 13 percent for FY21 and 5 percent for FY22.
• The company has advanced debt reduction calendar; aiming at zero net debt by end of calendar year 2020.

B&K Securities

Maintains ‘Buy’with target price of Rs 1,529.

• While oil to chemicals business impacted, new consumer businesses deliver robust growth.

Jefferies On Jio Results

• Lackluster rise in Average Revenue Per User despite steep tariff hikes.
• Increase in data and voice usage implies limited down-trading.
• Strong subscriber additions should allay concerns over the sustainability of tariff discipline.
• Profits driven by lower interest costs.
• Improving cashflow conversion and Return on Invested Capital, but cash burn persists.

UBS On Jio Results

• Stable quarter; ARPU expansion muted versus tariff hikes.
• Gross subscriber additions slowed, but so did churn; volumes have grown strongly.
• Partnership with Facebook could be a competitive advantage in the long term.