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Reliance Industries Ltd’s (RIL) shares are down 7.3% so far in FY23 compared to the 1% gain in the Nifty 50 index. Unfortunately, the company’s September quarter (Q2FY23) results do little to alter investors’ sentiments towards the stock. Consolidated Ebitda came in at 31,224 crore, 18% lower than Q1. Ebitda is earnings before interest, tax, depreciation, and amortization, and excludes other income.

The oil to chemicals (O2C) segment is the primary culprit here with the earnings before interest and tax (Ebit) dropping as much as 46% sequentially. The segment’s performance took a hit because of the introduction of special additional excise duty on transportation fuel. Weak polymer margins also dragged down the segment’s profits. To that extent, RIL’s consumer businesses, retail and telecom, fared relatively better, compensating for the weakness in O2C. Footfalls in the retail segment were up 23% over pre-covid levels. The average revenue per user in the telecom segment was 177.2 in Q2 versus 175.7 in Q1.

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However, that did not impress investors. Shares of RIL fell 1.5% on Tuesday to 2,441.55. Rising debt and capital expenditure (capex) are points of worry. RIL’s reported consolidated net debt as on 30 September was Rs93,253 crore, up from Rs57,655 crore as on 30 June. Reported net debt is at a two-year high, said analysts from J.P. Morgan India. Capex was Rs32,534 crore in Q2, up from Rs31,442 crore in Q1. The company said the rise in net debt can be attributed to higher working capital with the dislocation in energy markets, unfavourable forex movement and payment of the first installment of 5G spectrum acquired during the quarter.

RIL went through swift deleveraging since FY19 through infrastructure investment trusts, stake sale in the consumer businesses, and a rights issue. Post that, “RIL is re-entering an intense investment cycle with its ambitious new commerce plans and green energy aspirations. The company’s capex and debt are already rising," said analysts from Ambit Capital. “We believe that investors will be surprised by the extent of cash burn needed for Reliance Retail Ventures to compete with deep-pocketed global giants (unlike telecom). Further, RIL’s new energy initiatives are long-gestation and have substantial execution risks," they said in a report on 22 October.

RIL’s rising debt levels along with a relatively subdued outlook for its O2C segment means triggers for meaningful outperformance in the RIL stock appear capped. “Prospects for the rest of FY23E, have turned muted because of a sudden downturn in Asian gross refining margins (down to $4.05 per barrel PPost that on 21 October 2022 from a high of $29.5 per barrel in Q1), muted petchem spreads and the overhang of the additional export duties imposed on 1 July 2022," said analysts at ICICI Securities in a report on 23 October.

Meanwhile, the company has announced the demerger of its financial services undertaking, which will be re-named Jio Financial Services Ltd (JFSL) and would be listed on the stock exchanges. “We view this positively, and while we do not see this as a precursor to a potential demerger of the various consumer businesses, it does give shareholders a play on India’s Digital Fintech business," said analysts at J.P. Morgan India in a report on 22 October. However, RIL could face regulatory challenges here. 

RIL’s return ratios continue to remain low, analysts pointed out. Given the rising capex momentum, a significant improvement in the company’s return profile may not happen in a hurry.

Elsewhere in Mint

In Opinion, Vivek Kaul tells why our love of government jobs is bad for the economy. Pranjul Bhandari suggests a two-pronged strategy for India’s external balances. Andy Mukherjee writes on what Reliance will sell next to someone who’s already guzzling data. Long Story reveals how a China-linked firm ran a maze of fraud firms.

ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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