Brokerages cheer RIL’s results, but wary of Jio’s subdued show
Reliance Jio posted a mere 1% growth in net profit on a sequential basis with ARPU down to Rs137 in Q4
Mumbai: Brokerage firms applauded Reliance Industries Ltd’s (RIL’s) robust earnings on the back of strong performance of its petrochemical business but expressed concerns about the subdued performance of its telecom arm.
After market hours on 27 April, RIL reported its highest ever quarterly net profit of Rs9,435 crore, beating analysts’ estimates for the quarter to March.
However, the performance of the telecom arm, Reliance Jio Infocomm Ltd, remained subdued with the company posting a mere 1% growth in net profit on a sequential basis as the ongoing tariff war, which Jio triggered, brought down its average revenue per user (Arpu) to Rs137 in the March quarter from Rs154 a quarter earlier.
“Reliance delivered solid results, which were in line with consensus. Petrochemicals was the standout performer on growth and margins,” Sanford C. Bernstein and Co. said in a note, adding that with downstream expansion largely complete and margins at cyclical highs, Jio will become increasingly important for earnings growth. “While (telecom) subscriber growth remains impressive, the pricing war for market share looks set to continue in the near term,” Sanford analysts Neil Beveridge and Jimmy Zheng said in a report on 28 April. They have a marketperform rating on the stock.
A few analysts were hopeful that competitive intensity in the industry may abate.
“RJio has done well in terms of subscriber growth, gaining a notable market share over the last few quarters. However, our profitability estimates are premised on expectations of reducing freebies beyond 1QFY19 and subsequent Arpu accretion,” Motilal Oswal Securities Ltd said in a note on 28 April.
“Albeit recent Arpu cuts have been disappointing, we believe that, over the next 2-3 quarters, competitive intensity may abate, increasing industry revenue pool and offering strong growth potential,” Motilal Oswal analysts said while maintaining their buy rating on the stock.
For IDFC Securities, which reiterated its “neutral” rating on the stock, the E&P (exploration and production) business was a key laggard, and elevated debt levels a concern. “With growing momentum on downstream expansion/margin improvement projects and the strong performance of Jio, the potential for earnings growth over FY19-20E is not in doubt, with the substantial volume increase in petchem and margin improvement in both refining/petchem segments and the growth in Jio operating earnings over FY19-20E,” IDFC analysts said in a note on 28 April.
“Having said that, we remain sceptical of any meaningful expansion in RoE/RoCE (return on equity/return on capital employed) levels, with the operating profit improvement offset by higher depreciation/interest costs due to higher capex in FY15-20E and resultant higher debt on the books,” IDFC analysts added.
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