Investors have not stayed annoyed over RIL-Aramco deal falling through, as a rebound shows
The prospects for the telecom business are upbeat as the vertical showed resilience in Q2FY22
Reliance Industries Ltd’s (RIL’s) investors were rightly miffed after the much hyped deal with Saudi Aramco in the oil-to-chemicals (O2C) segment fell off the table. The roughly 3% fall of RIL’s share price after the announcement of the deal being called off reflects this. However, investors have not stayed annoyed and this is reflected in the recent bounce back of the shares.
The prospects for the telecom business are upbeat. Reliance Jio announced tariff hikes on Sunday, following similar moves by competitors such as Bharti Airtel and Vodafone India Ltd earlier in the week. This improves the earnings outlook for the segment and RIL significantly.
“Jio, the telecom vertical of Reliance Industries, is in a sweet spot as peers Bharti Airtel and Vodafone India Ltd have taken a 20% tariff hike," said analysts at Motilal Oswal Financial Services Ltd (MOFSL). They expect the hike to lead to a 22% and 7% upside on RJio and consolidated Ebitda. Improving traction in JioPhone Next should also help. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.
The telecom vertical had shown resilience in the September quarter. Average revenues per user (Arpu) during Q2 grew a healthy 3.7% on a sequential basis. The price hikes may further strengthen Arpu and margins. The segment Ebitda margin at 47.0% had marked an expansion of 390 basis points (bps) year-on-year (y-o-y) and 10 bps sequentially during Q2. One basis point is one-hundredth of a percentage point. However, the subscriber additions were underwhelming for Jio during Q2.
That said, Jio continues to gain market share. “Market share shifts continued towards Reliance Jio and Bharti Airtel, with the operators gaining 150 bps and 230 bps market share in H1FY22 vs their FY21 levels to 39% and 35%, respectively," wrote analysts at Jefferies India Pvt. Ltd in a 24 November note.
The company’s other consumer-focused business—retail—is seeing a good rebound and strong improvement after the easing of restrictions imposed to contain the spread of coronavirus. The September quarter had seen double-digit growth continue with a share of non-essentials improving in the grocery segment. Fashion and lifestyle was the best performing segment, with revenues doubling, led by festivities and promotions. This was despite footfall being at 78% pre-covid levels, analysts pointed out. This is expected to improve further in Q3. The aggressive store addition should help.
“We see price hikes in the telecom business and revival in the retail business, led by strong growth potential in JioMart, as key levers for the stock over the next two years," said analysts at MOFSL.
However, analysts did not see a lasting impact on the O2C business from the deal with Saudi Aramco falling through. Analysts say that the objective of the deal was to help RIL deleverage and set a valuation benchmark. As such, the company has been able to achieve its deleveraging objective through multiple deals in other businesses. “With RIL in no need of a further infusion of funds, this transaction, pending for almost two years, was looking doubtful earlier," said analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd. They also believe that in the present business environment, it would have been difficult to agree on valuation. Further, the proposed site of new energy investments, as well as the existing site of the O2C business could have been a point of differences on how to apportion the land, said analysts.
As a Mint story on 26 November pointed out, RIL has decided to transfer its gasification assets to a wholly owned subsidiary as a step towards attracting strategic investors into these assets. The overarching goal is to improve its ESG initiatives with investments into green initiatives.
On the positive side, the key drivers for growth and valuations for O2C business are in place. The company is seeing healthy growth in the petrochemical segment, while the refining margins, though volatile, have bounced back. The company has also announced ambitious investments in the renewable energy space.
The upshot is that the current correction in RIL’s shares may not last long.
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