Quite a few analysts have cut earnings estimates after Reliance Industries Ltd (RIL) announced its June quarter results on Thursday evening.
Macquarie analysts have further cut FY2021-2023 earnings per share (EPS) post 1Q by 2%-5% taking the year-to-date EPS cut to about 40%. The brokerage firm added in a report on Friday, “While a weak quarter was anticipated, we highlight 13%-20% earnings downgrade risk to consensus for FY21-23."
Post results, RIL shares were trading about 2% lower on Friday on the NSE.
Kotak Institutional Equities has cut FY21 EPS by 4% and broadly retaining forecasts for FY22 and FY23. “We lower our FY21 Ebitda estimates by 10% to reflect weakness in refining, petchem, and retail, as evidenced in the June quarter results," said Citi analysts.
Ebitda is earnings before interest, tax, depreciation and amortisation; a measure of profitability. Speaking of which, RIL’s consolidated Ebitda for the June quarter came in at Rs16875 crore. This is 6% lower than Bloomberg’s consensus estimates of ten analysts.
So what were the key disappointing factors?
Covid-19 restrictions have wreaked havoc on retailers, as operations have been significantly curtailed and footfalls lower. 50% of RIL’s retail stores across segments were fully shut last quarter. Still, retail Ebitda drop of 47% year-on-year is striking. Revenues from consumer electronics and fashion & lifestyle segments were hit particularly badly while grocery did better.
Further, RIL’s energy segments, which include refining and petrochemicals businesses, posted a rather tepid performance. True, expectations were low owing to the pandemic. Refining and petchem Ebitda declined year-on-year by 26% and 50%, respectively. Commenting on its petchem business, RIL said the quarter was challenging due to the covid-19 lockdown. It said the domestic industry and supply chains virtually came to a halt as both producers and converters shut down plants across India. Export realisations were lower.
RIL’s gross refining margin (GRM) of $6.3 a barrel compared to negative $0.9 a barrel in benchmark Singapore GRM is commendable. Crude oil and fuel products’ demand was hurt due to travel restrictions and shutdowns. To some extent, optimized crude procurement, relatively higher utilization, cost management and agile product placement, offered respite.
On the flip side, RIL’s telecom division or Reliance Jio Infocomm Ltd put up a good show, doing most of the heavy lifting. Note that telecom Ebitda rose by an impressive 55% offsetting some of the underperformance in energy and retail. Tariff hikes taken in December have reflected handsomely in Jio’s performance, leading to 7.4% quarter-on-quarter Arpu growth in the June quarter.
To be sure, as the world learns to cope with the pandemic, RIL’s overall earnings are likely to stay depressed in the near-term given that recovery would be slow. Nevertheless, these concerns don’t seem to perturb investors as much. After all, the RIL stock is flirting with new highs, touching a 52-week earlier this week.