Rebound in petchem, retail business to drive RIL Q3; JioMart road map eyed

JPMorgan would focus on Reliance Industries' management's commentary on Jio Platforms, and Jio Mart rollout

Driven by a strong rebound in petrochemicals business, and supported by growth in the retail segment, Reliance Industries Ltd (RIL) is expected to clock a stellar sequential improvement in its net profit for the December quarter of the current financial year (Q3FY21). The firm is scheduled to report its Q3 earnings on Friday, January 22.

Analysts are penciling-in up to 32 per cent sequential growth in RIL’s consolidated net profit, pegged at Rs 12,600 crore, against a profit after tax (PAT) of Rs 9,567 crore reported in the September quarter of FY21 (Q2FY21).

“Sharply lower interest costs and a continued decline in the tax rate should drive around 32 per cent increase in attributable PAT on a quarterly basis. As regards the pre-tax profit, it should still be down year-on-year, given a sharply lower consolidated tax rate,” wrote analysts at JPMorgan in a result preview report. RIL’s profit before tax (PBT) and net profit in the year-ago period stood at Rs 15,082 crore and Rs 11,640 crore, respectively.

Those at BofA Securities, however, remain mildly cautious in their estimate and peg the net profit at Rs 11,100 crore for the quarter.

“We expect RIL to show a 16 per cent QoQ increase in PAT led by improving oil-to-chemicals (O2C) business, a strong continued momentum in retail, and steady Jio. The net income increase is further aided by a 20 per cent sequential decline in finance expenses due to cash coming in Jio Platforms and Reliance Retail from Google and financial investors, respectively,” they noted.

Since April 2020, RIL chairman Mukesh Ambani has sold nearly 33 per cent in Jio Platforms to global marquee investors, bringing a cash inflow of around $20 billion (Rs 1.52 trillion). Meanwhile, nearly 10 per cent stake sale in Reliance Retail towards the end of 2020 resulted in another $6.4 billion (Rs 47,300 crore) of inflow for RIL.

Operationally, Goldman Sachs foresees Reliance’s consolidated core Ebitda (earnings before interest, tax, depreciation, and amortisation) to grow 13 per cent over the September quarter to around Rs 21,408 crore. This would, however, be a 5 per cent decline year-on-year. Ebitda in Q2FY21 and Q3FY20 were Rs 18,945 crore and Rs 22,386 crore, respectively.

Back home, Edelweiss Securities expects a strong petchem Ebitda of over 15.7 per cent quarter of quarter (QoQ), refining Ebitda of 13 per cent QoQ, and retail Ebitda of 34 per cent QoQ will be partly offset by a modest telecom Ebitda of 5.6 per cent QoQ, leading to an 8.3 per cent QoQ increase in consolidated Ebitda to Rs 20,522 crore.  

Segment-wise analysis

O2C business

BofA expects overall O2C Ebit to be up 14 per cent QoQ, led by a steady momentum at the Petchem business. Further, they expect refinery Ebit to be largely flattish and modest improvement in gross refining margins (GRMs).

Meanwhile, Goldman Sachs pegs GRM, which measures the earnings from turning every barrel of crude oil into fuel, at $6.5 per bbl, up $0.8/bbl QoQ from $5.7 per bbl, supplementing the recovery in refining utilisation/volume. The brokerage further forecasts 16 million tonnes in throughput over the third quarter compared with 15 million tonnes in the second.

A conservative estimate by Edelweiss Securities, however, pegs GRM at $5.8/bbl (down 37 per cent YoY from $9.2 per bbl) on the back of weaker cracks across distillates. “Petchem margin may increase YoY due to higher polyster and polymer spreads and with moderate demand leads to an increase in petchem Ebitda,” it added.

Retail

A rebound in footfall in retail store, due to the festive season may drive core retail revenues up 47 per cent QoQ, and 10 per cent YoY, says Goldman Sachs. “We expect positive growth for grocery, while fashion and electronics will remain flattish YoY. We expect core Ebitda to grow 31 per cent QoQ at 12 per cent below last year’s levels,” it added.

BofA analysts, on the other hand, expect operational leverage to help in Ebitda margins by 92 bps to 5.8 per cent, leading to overall Ebit growth of 38 per cent QoQ. Retail Ebit stood at Rs 2,389 crore in the year-ago quarter, while it was Rs 1,522 crore in Q2FY21.

Telecom

Jio’s Ebitda, analysts say, is expected to remain stable on account of decent subscriber additions (about nearly 10 million in Q3), and higher Arpu (Rs 145).

“We look for improving subs mix to help in 1.8 per cent QoQ improvement in implied average revenue per user (ARPU). Overall, we expect Jio to report 3.6 per cent sequential revenue increase. We expect Ebitda margin to improve by 14 bps QoQ to 43.7 per cent, led by continued revenue growth,” note BofA report.

Stock performance

RIL shares have pulled back 17 per cent since mid-September 2020 and have underperformed the Nifty by 41 per cent. Goldman Sachs believes continued sequential earnings recovery along with catalysts around telecom tariff hikes, new product launches (non-grocery e-commerce, for example), and a potential energy business stake sale can reverse this underperformance.

On similar lines, JPMorgan would focus on the management’s commentary on Jio, and Jio Mart rollout.