The announcement of the imminent commercial launch of services by its telecom unit—Reliance Jio Infocomm Ltd—at its annual general meeting has augured well for the Reliance Industries Ltd (RIL) stock. Its share price has risen 7.5% from its recent low on 2 September. But it’s worth remembering that the stock has been an underperformer compared to the benchmark Sensex so far this year.
If you thought September quarter results would change sentiments dramatically, you are likely be disappointed. Stand-alone revenues have declined year-on-year but better operating profit margin, strong other income growth, and decline in finance and depreciation costs have helped the company report 20% growth in its pre-tax earnings.
But that won’t impress investors. Here’s why: stand-alone Ebitda for September quarter came in at Rs10,555 crore. A poll of Bloomberg analysts was expecting the company’s Ebitda at Rs10,569 crore. That’s pretty much in line. Ebitda is earnings before interest, tax, depreciation and amortization.
Unlike the June quarter when RIL’s gross refining margin (GRM) had surprised the Street positively, this quarter was fairly lukewarm. To be fair, GRM of $10.1 a barrel is not bad at all. The company’s premium over Singapore GRM has dropped to $5 a barrel from as much as $6.5 a barrel. But investors are unlikely to punish the stock for that. For one, the company’s GRM margin is slightly better than some brokerage firms’ estimates. Motilal Oswal Securities Ltd was expecting a GRM of $10 a barrel while analysts from Jefferies India Pvt. Ltd had forecasted a GRM between $9.5-10 a barrel.
What really came as a big surprise this quarter is the performance of the petrochemicals business. According to the company, consolidated petrochemicals Ebit margin expanded to a 14-quarter high of 15.2% for the September quarter as product deltas held up well despite lower prices. Delta is the rate of change in prices compared with the change in unit costs. Strong volume growth also helped. Stand-alone petrochemicals Ebit increased to 16.3%, higher sequentially as well as on a year-on-year basis.
As usual, the oil and gas business was a laggard, with Ebit declining as much as 83% year-on-year, adversely impacted by lower upstream production in domestic blocks along with lower prices. Sure, RIL’s organized retail business has done well but the segment is too small to make a big difference to overall numbers.
On a consolidated basis, the company’s debt service coverage ratio has declined to 0.88 from 2.79 in the June quarter. Is that a worry? According to independent analyst S.P. Tulsian, the decline in debt service coverage ratio should hardly be a concern for a company with RIL’s cash flows. Other analysts say the fall in the debt service ratio below 1 is just for one quarter and should not be extrapolated.
What of the stock? Currently, RIL trades at 12.4 times estimated earnings for this fiscal year. Valuations aren’t exactly cheap considering that the refining environment is still sluggish. So far this quarter, benchmark Singapore GRM has averaged only marginally higher at $5.3 a barrel, says an analyst. RIL’s net debt has increased by about Rs10,000 crore sequentially to Rs1.06 trillion.
Investors should watch out for that measure in the days to come. It goes without saying that news flow on the telecom ramp-up will be crucial for the RIL stock.