Most brokerages bullish on RIL despite Q4 miss; here's why

Shares of Reliance Industries (RIL) dipped 2.5 per cent in Monday's session as the oil-to-telecom conglomerate missed Street's estimates when it posted its March quarter results on Friday, leading to selling in the stock.

While Mukesh Ambani-led RIL posted a 108 per cent year-on-year (YoY) rise in profit after tax for the fourth quarter of FY21 at Rs 13,227 crore, it fell short of Bloomberg estimates of Rs 13,704 crore.

The oil-to-telecom conglomerate's revenue from operations rose 11 per cent YoY to Rs 1.54 trillion during the quarter as compared to Rs 1.39 trillion in the year-ago period. Bloomberg analysts had pegged revenue expectations for Q4 at Rs 1.39 trillion.

Segment-wise, the revenues in the dominant oil-to-chemicals (O2C) business rose 4.4 per cent to Rs 1.01 trillion in Q4FY21 from Rs 96,732 crore in the same period last year (Q4FY20). Meanwhile, the revenues from digital services came in at Rs 22,628 crore as against Rs 19,153 crore in the same quarter last year. And the revenues of the company's retail business were at Rs 41,296 crore for the quarter under review.

Jio Platforms clocked a net profit of Rs 3,508 crore for the quarter under review, up by 47 per cent YoY, although its ARPU (average revenue per user) during the quarter came in at Rs 138.2 per subscriber per month as against Rs 151 per subscriber per month in the trailing quarter.

The scrip settled the day 1.89 per cent lower at Rs 1,956.80 on the BSE.

Here's what key brokerages said on the company and stock post the results announcement:

JP Morgan | Neutral | Target Price: Rs 2,055

RIL reported a large miss at the net level driven by higher-than-expected interest costs, a higher tax rate and a large Jio EBITDA and ARPU miss. The O2C business performance was in line while retail was a beat. The management commentary was cautious given the second Covid wave, and overall we see meaningful downside risks to earnings (barring another year of <10 per cent tax rate).

The earnings environment remains weak at the operating level with Refining, Retail and Jio outlook tepid. We see clear downside risks to earnings across businesses barring Petchem. Seasonally, we are entering the strong news flow period in the run-up to the AGM, which could keep the stock supported in the near term.

Morgan Stanley | Overweight | Target Price: Rs 2,262

We maintain an Overweight rating on RIL and see torque from an upcycle supporting earnings, which lagged peers by nearly 36 per cent over the past year. Our forecasts imply upside to street estimates for FY22/FY23, supported by a supply slowdown in chemicals and refining and a rise in gas production and subscriber net adds. We raise our petrochemical margin assumptions but lower retail revenue forecasts to factor in the impact of the recent lockdowns in India. We also see a slower path for rising ARPU and hence push it out to FY23.

Overall, we lower our FY22 earnings by 7 per cent, however, we do see a 23 per cent CAGR from pre-Covid profitability as the upcycle plays out across businesses.

Nomura | Buy | Target Price: Rs 2,400

In line with our expectations, RIL reported sequentially better EBITDA for all key segments. Driven by sharply lower other income, higher depreciation and tax provision, the bottom-line was weaker with PAT below our estimates.

With the recent surge in the Covid-19 pandemic, there would be an impact on key businesses. We see the maximum impact on retail (foot-falls declined to 35-40 per cent of pre-pandemic levels). We see a relatively lower impact in O2C as lower demand will likely be offset by higher margins. In Jio, while we do not see much impact on subscriber growth, the expected tariff hike could get pushed by few months to the second half of FY22. In our view, near-term weakness does not weaken the medium-term outlook. We expect a 33 per cent earnings CAGR over FY20 to FY23F.

Deterioration in refining margins, weakness in petrochemical margins, sharper rupee appreciation, lower-than-expected Reliance Jio profitability and slowdown in Reliance Retail's growth are among key risks, the brokerage said.

HSBC | Hold | Target Price: Rs 2,070
 

We continue to like RIL’s business and balance sheet and believe all three of its core businesses – O2C, Retail and Digital Services – have become self-sustaining and cash-generating, with Retail and Digital growing strongly. Recent stake sale transactions have set a valuation benchmark, but investors are now likely to watch out for a new meaningful uptick in business performance. 

Our FY22 estimates remain largely unchanged while FY23e earnings increase 6 per cent driven by lower debt forecasts resulting in lower finance costs. We continue to value RIL on a sum-of-the-parts basis, with an unchanged TP of Rs 2,070. We roll forward our valuation to FY23e, which we discount back to arrive at our current fair valuation. 

CLSA | Outperform | Target Price: Rs 2,250

Reliance’s Q4FY21 standalone EBITDA missed by 5 per cent and lower other income drove a bigger 12 per cent PAT miss. Jio’s EBITDA was inline as higher subscribers offset a lower Arpu. Retail’s EBITDA was 12 per cent ahead and ensured consolidated PAT was inline. A rise in Covid-19 cases impacted Retail with only 44 per cent of its stores open in April. This and a delay in tariff hikes along with lower downstream margins, drives our 8-13 per cent cut in FY22-23 EPS but we maintain our target price as we reset our Retail target multiple in-line with the rise in peer valuations. It is trading above its recent deal benchmark valuation. This, along with a lack of significant triggers and potential earnings downgrades may limit

near-term upside. However, we maintain our outperform rating on its long-term promise.

ICICI Securities | Hold | Target Price: Rs 2,033

Petrochemical and retail were the bright spots in RIL's Q4 performance. Retail may lose momentum due to Covid second wave while petrochemicals may be hit by large capacity additions in the second half or Q4 of FY22E. Regaining momentum in subscriber addition, tariff hikes, retail growth back to pre-Covid levels, GRM (gross refining margin) recovery and stake sale in O2C are key to stock performance improving which has underperformed benchmark since September 2020.

HDFC Securities | Add | Target Price: Rs 2,285

Our ADD rating on RIL is premised on the induction of Facebook, Google, Intel and Qualcomm as partners in Jio Platforms, which should help the company accelerate the growth of digital connectivity and create value in the digital ecosystem through technology offerings. Furthermore, we see recovery in refining and petchem businesses in FY22E. The emergence of a clear path to a stronger balance sheet and stake sale in the retail business are other key positives.

The stock is currently trading at 9.6x March23E EV/EBITDA and 19.1x March-23E EPS.