Refining edge, consumer biz success can keep RIL on top

ET Intelligence Group: On Friday, the country’s most valuable company Reliance Industries (RIL) created a new valuation benchmark, vaulting past the Rs 9-lakh-crore market-cap barrier for the first time and also another record in superlatives: Of the highest quarterly net profit. Its performance is likely to stay robust if refining margins remain superior to a key regional gauge, and consumer businesses continue to expand at current rates.

Expectedly, the RIL stock has outperformed benchmarks by 9% in the past three months, thanks in no small measure to the proposed sale of its energy assets to Saudi Aramco. A cut in corporate taxes also helped.

Quarterly earnings have surpassed Bloomberg’s consensus estimates, although upside potential for the stock would depend on the core energy vertical. RIL has beaten Bloomberg consensus estimates 14 times out of the last 18.

Analysts are focused on RIL’s gross refining margins (GRM), or what the company earns from turning every barrel of crude oil into motor fuel or other energy forms. GRM improved to $9.4 per barrel in the September quarter, compared with $8.1 in the previous quarter. Its premium over the Singapore GRM, a regional benchmark, was $2.9 per barrel against a sixquarter average of $4.33 per barrel.

Analysts believe a tight global market reduced the cost competitiveness of heavy crude that has higher sulphur content, something RIL’s state-of-the-art refinery can process.

To be sure, global macro headwinds continue to weigh on RIL’s refinery & petrochem businesses. The latter vertical witnessed lower realisation due to falling margins on mono-ethylene glycol, paraxylene, polyethylene and polypropylene. This caused operating profit in the division to contract 6.3%, despite a volume growth of 5.3%.

But RIL’s consumer-facing businesses are helping more than offset the global headwinds. The telecom and retail businesses accounted for 28% of RIL’s revenue in the September quarter, logging gains of 545 basis points from a year ago.

RIL’s retail business appears to have upended the broader consumption-slowdown story in India, with revenue growth at Reliance Retail climbing 27% to Rs 41,202 crore.

Retail stores reported a 13% increase in footfalls, while 337 new stores were added, taking the total store count to 10,901.

At present, the quarterly revenue of RIL retail is higher than the annual revenue at the next largest retailer in the country.

Reliance Retail operations reached 24.5 million square feet, a gain of 25.6% on a year-on-year basis. Nearly two-thirds of its stores are in tier 2-4 cities.

In the telecom space, Reliance Jio’s revenue expanded 5.7% sequentially, with net subscriber addition of 23.9 million during the quarter under review. Average revenue per user remained largely unchanged at Rs 120 in the September quarter, compared with Rs 122 in the previous quarter.

RIL’s quarterly capital expenditure run-rate has come down to Rs 19,095 crore, as compared with about Rs 30,000 crore in the past six quarters. Total debt increased to Rs 2.91 lakh crore in September 2019 from Rs 2.58 lakh crore in the same quarter last year. The company’s net debt, which takes into account the cash in hand, is about Rs 1.57 lakh crore.