What's in store for RIL Q2: Financials may rally, full revival not yet

Morgan Stanley analysts estimate although Q2 earnings could improve on a sequential basis, they could be 20 per cent below pre-Covid levels

For Mukesh Ambani-led Reliance Industries (RIL), the financial performance for the July-September quarter (second quarter, or Q2) is expected to show sequential improvement. Full recovery, however, is still some quarters away. 

“RIL is expected to show sequential recovery. The timeline for pre-Covid-level performance will sync with the macroeconomic improvement (as and when it happens),” said Nitin Tiwari, vice-president, Antique Stock Broking. 

According to news reports, the oil-to-telecom company this month rolled back the paycuts it had implemented for the hydrocarbon division in April. The petrochemicals (petchem) business is expected to post significant sequential recovery for the quarter under review; however, refining margins remain weak. 

“The management’s decision to roll back paycuts for the hydrocarbon business may reflect demand erosion not being as elongated as expected earlier. However, the management may provide more clarity on it,” added Tiwari.

In a Bloomberg poll, 14 analysts estimated a net profit of Rs 8,194 crore; 10 analysts estimated a revenue of Rs 1.11 trillion for the company. 

A year ago, RIL had reported a consolidated revenue of Rs 1.63 trillion and a net profit of Rs 11,262 crore.

“Although Q2 earnings could improve on a sequential basis, we see them 20 per cent below pre-Covid levels. We estimate RIL’s earnings to normalise to pre-Covid levels by early 2021, given such signs have emerged in the current quarter,” said Morgan Stanley analysts in a note on the firm this month. Analysts with JPMorgan echoed similar views, tying RIL’s return to recovery to hikes in tariff. 

RIL’s earnings trend is unlikely to change materially in the near term; 2021-22 earnings recovery will mostly be dependent on a telecom tariff hike, analysts said, adding, “Even the second half of 2020-21 earnings recovery will be dependent on tariff hikes.”

On a sequential basis, RIL’s petchem business is expected to report an improvement in earnings. “Q2 earnings should show sequential improvement, with petchem being in the driver’s seat,” the Morgan Stanley report said. 

Morgan Stanley analysts expect 25 per cent sequential improvement in earnings before interest, tax, depreciation, and amortisation (Ebitda) for this segment owing largely to a blend of improved polyethylene prices, olefin spreads, and strong polyvinyl chloride and styrenic value chains, along with lower exports. On a year-on-year (YoY) basis, Ebitda for petchem is still expected to be down 38 per cent.

Analysts also warn of recovery in the retail and refining segment to be weaker than the forecasts. Certain brokerages estimate gross refining margins for the period under review to range between $5.7 per barrel and $6 per barrel. Analysts at Morgan Stanley add that their $5.7 per barrel estimate is the lowest in more than a decade. 

The telecom business is expected to report 4.7 per cent sequential and 32 per cent YoY growth in revenue, and an average revenue per user sequential improvement of 2.5 per cent to Rs 143.8. Analysts estimated 13 per cent sequential growth in net profit and a significant 188 per cent jump on a YoY basis.

The quarter under review also saw the company on a deal spree for its retail segment, similar to its partial divestment of stake in the digital services business a quarter ago. 

The Street will also look for management commentary on the issues around the proposed acquisition of Future Group’s retail assets.