Investors should note that they may have built in far too high expectations from RIL. To deliver on these would be a tall order. (Naveen Kumar Saini/Mint)
Investors should note that they may have built in far too high expectations from RIL. To deliver on these would be a tall order. (Naveen Kumar Saini/Mint)

RIL Q4 results should provide a reality check for investors

  • The big drag for RIL continues to come from its refining business, where Ebit fell by 18.6% sequentially
  • Reliance Jio and Reliance Retail did relatively better, but could not make up from the refining shortfall

Mumbai: Reliance Industries Ltd (RIL) has been among the best performing large-cap stocks in the past year. The stock has risen by 45% in the past 12 months, compared to a rise of less than 12% in the Nifty 50 index. Needless to say, expectations are running very high.

In that backdrop, RIL Q4 results may be a tad disappointing for investors. Consolidated profit before tax fell 4.1% sequentially to 13,858 crore in the March quarter. RIL’s increasing debt is biting. Consolidated earnings before interest and tax (Ebit) rose 1% sequentially to 18,752 crore.

The big drag continues to come from the refining business, where Ebit fell by 18.6% to 4,026 crore. Of course, it is well known that Singapore gross refining margins (GRM) have fallen sharply in recent months, and to that extent RIL’s reported refining margin of $8.2/barrel doesn’t come as a big negative.

The problem, however, is that other segments didn’t make up for the shortfall from the refining segment. After eight successive quarters of increases in profits, Ebit of the petrochemicals business fell 2% sequentially to 7,819 crore.

And while the much-touted consumer businesses in did deliver, they are still relatively smaller in size to make up for the shortfall of the much larger refining segment.

Reliance Jio Infocomm Ltd’s Ebit rose 13% sequentially in Q4, although most of that increase was given away in higher interest costs. As such, pre-tax profit of the telecom business was flat sequentially, despite another stellar quarter in terms of subscriber growth. Average revenue per user (arpu) fell marginally as well, with the share of JioPhone customers increasing in the pie.

Note also the stark difference between Reliance Jio’s profits and its capital expenditure. Jio generated Ebitda (Ebit plus depreciation and amortization) of 15,102 crore in FY19, but its capex stood at 66,000 crore. Evidently, cash burn and indebtedness remain high for RIL’s digital services business.

While the conglomerate has restructured its telecom debt and transferred some debt to special purpose vehicles, this doesn’t count for much until new investors come to share the load.

Reliance Retail Ltd, meanwhile, had another strong quarter, with Ebit growth of 14% sequentially to 1,721 crore in Q4. Margins continued to improve, and the strong performance supports the prospects of an initial public offering of the division.

Despite the overall sedate performance, investor sentiment in the RIL stock may continue to be positive on a possible stake sale in the refining and petrochemicals business. Of course, much depends on the valuation, if such a deal occurs with Saudi Aramco. But without such triggers, investors should note that they may have built in far too high expectations from RIL. To deliver on these would be a tall order.

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