Home >Markets >Mark To Market >RIL has no bad surprises in Q4, but that’s not enough for stock

In today’s unpredictable times, no bad news is good news. Investors of Reliance Industries Ltd (RIL) can take comfort from this thought. After all, its March quarter earnings announced on Friday evening had no unpleasant revelations, even as Jio’s net subscriber additions are striking.

Overall, RIL’s consolidated earnings before interest, taxes, depreciation and amortization (excluding other income) for Q4 stood at 23,351 crore vis-à-vis the Bloomberg consensus estimate of 23,307 crore.

As such, investors awaiting fresh triggers from RIL’s Q4 earnings may be a tad disappointed. Plus, the second covid wave poses near-term risks. Analysts from Jefferies India Pvt. Ltd have cut consolidated earnings per share by 2% for FY22E to factor in the covid impact.

Soaring infections would stall RIL’s retail business recovery. RIL has said footfalls have dropped to 35-40% of pre-covid levels in April (versus 88% in Q4FY21). Further, mobility curbs may impact volumes in RIL’s oil to chemicals (O2C) business.

Last week, RIL shares rose by 4.7% on the National Stock Exchange. Some of this optimism can be attributed to the news on Saudi Aramco’s potential investment for a 20% stake in RIL’s O2C business. A Financial Times report said talks have revived between Saudi Aramco and RIL in recent weeks to finalize a deal, entailing a shares-and-cash consideration.

Indeed, some analysts reckon now that the March quarter results are out of the way, investors’ focus might shift to updates on the Saudi deal. Note that the RIL stock has declined 14% from its September 2020 highs. Of course, before that, RIL’s shares had a phenomenal run, helped by stake sales in its digital arm—Jio Platforms Ltd—followed by the retail arm—Reliance Retail Ventures Ltd. The stock appreciated around 54% in 2020 until it touched a high of 2,324.55 on 16 September against a 4.6% drop in the Nifty 50 index. “The stock would need a big Aramco kind of development to do well now," says an analyst, seeking anonymity.

Probal Sen, senior vice-president at Centrum Broking Ltd, said, “There is an expectation that the Saudi deal would help unlock value and enable RIL’s transition to a new materials and more specialized chemicals company and, thereby, improve the yields per barrel. It would also help RIL move away from the traditional refining business, which fetches lower valuations and faces an era of a gradual reduction in demand over the next decade."

Of course, investors would have to watch the deal contours when it happens. When the deal was first announced at RIL’s annual general meeting in 2019, the funds from the transaction were meant to facilitate the company’s net debt reduction. Since then, RIL’s balance sheet has improved with reported net debt at a negative 2,208 crore at March-end.

In a report on 29 April, analysts from UBS Securities India Pvt. Ltd said, “We think that while the initial deal would have aided deleveraging, now Reliance is already net debt-free with capital raise of about $30 billion through consumer business monetization and rights issue. So now, the O2C transaction could be focused on bringing strategic investors, crude supply security, etc., but with lesser compromise on valuations. Furthermore, Reliance, in the last AGM, had mentioned interest of PE players in the O2C division"

According to Sen, “Separately, for the stock, the launch of the affordable Jio-Google smartphone is another trigger, going ahead."

Coming back to RIL’s March quarter earnings, the O2C and retail business performance was decent. Jio’s 15.4 million net subscriber additions compare well with 5.2 million and 7.3 million additions in the December and September quarters, respectively. “The pickup in Jio’s net additions could also imply positive read-through for Bharti’s 4Q and bodes well for the sector tariff outlook," said Jefferies’ analysts in another report. However, Jio’s average revenue per user at 138.2 declined sequentially due to the change in interconnect regime.

To be sure, the lack of bad surprises may well offer some support to the stock. According to Jefferies, “Acceleration in user additions and Jio turning FCF (free cash flow) positive earlier than expectations help alleviate key concerns (on the stock)."

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