RIL’s consumer businesses deliver on growth; investments stay high
In the first six months of the year, Reliance Jio has spent about ₹44,000 crore in capital and operating expenses (excluding interest and depreciation). In the same period, it earned revenues of ₹17,350 crore.
To say that expectations from Reliance Industries Ltd (RIL) are running high is an understatement. The company’s shares are among the best performers on the Street, and even after the recent correction—the stock is down 13% from its highs—valuations are rich.
In this backdrop, investors may be disappointed that RIL’s September quarter earnings fell short of expectations. According to data collated by Bloomberg, analysts had estimated a 4% sequential increase in the company’s profit before tax. Instead, RIL has reported a 4% drop in pre-tax profit.
The mismatch is largely due to a higher-than-expected 25% increase in net interest costs. Given the sharp depreciation in the rupee, a higher interest cost burden on the company’s foreign loans isn’t entirely surprising; although analysts seem to have been caught a bit unawares.
As far as business operations go, things played out more or less according to script. The refining business reported earnings before interest and tax (Ebit) of ₹5,322 crore, almost the same as in the June quarter. While refining margins, at $9.5/barrel, were lower than analysts’ estimates, the weaker rupee helped the RIL maintain profits.
Petchem margins were soft for a number of products too, except paraxylene, where spreads rose sharply last quarter. Put together, this resulted in a 3% increase in Ebit at the petchem division to ₹8,120 crore. The fact that profits rose off the very high base of the June quarter will be heartening for investors.
Of course, much of the excitement around RIL’s shares has to do with its consumer businesses, namely telecom and retail. Neither of them disappointed, at least on profit growth. Reliance Jio Infocomm Ltd reported a 19% sequential jump in Ebit to ₹2,042 crore, while the retail business reported a 16% increase in Ebit to ₹1244 crore. Reliance Retail Ltd’s profit growth has come on the back of a rapid expansion in the number of stores, and the related benefits of leverage.
Together, the two businesses now account for nearly 20% of total profit at the company, compared to just 5% a year ago. Jio’s subscriber growth and average revenue per user were both ahead of analysts’ estimates.
Of course, there is still a long way to go. RIL said in its annual report for FY18 that its aim is to have the consumer businesses contribute as much as the energy and materials businesses in the next decade. And, from the looks of it, the company is leaving no stone unturned to achieve this.
In the telecom business, capex remained exceptionally high at ₹16,000 crore in the second quarter. In the first six months of the year, Reliance Jio has spent about ₹44,000 crore in capital and operating expenses (excluding interest and depreciation). In the same period, it earned revenues of ₹17,350 crore. In other words, cash burn has remained at high levels. The investment phase is expected to continue, given that the company is still far behind its ultimate targets.
While this is undoubtedly bad news for Reliance Jio’s competitors, it isn’t very comforting for its own investors either. With debt and interest costs rising, value left for equity owners may end up being lower than what investors had hoped for.
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