RIL stock shrugs off earnings

Share frets over capex and telecom foray; falls after announcement of estimate-beating results in four of five quarters

Reliance Industries Limited’s (RIL)’s quarterly performance and stock price have diverged in the past year. For the past five quarters, the company’s core standalone (oil and gas) net profit has beaten consensus Bloomberg estimates by 3-17 per cent. Yet, the RIL stock has fallen after results’ announcement in four out of five quarters. The firm typically announces results after market close; hence, the next day’s stock performance is the best way to assess the results’ impact on the stock.

Does this divergence indicate the Street has started looking beyond the net profit of the company? Although the stock price movement seems to support this view, the question is — what factors are the investors watching out for?

There are two key factors or developments the Street is closely following. One is the timing of completion and commissioning (starting) of capital expenditure (capex) in the core oil and gas business, especially petrochemicals. Notably, the 100 per cent commissioning (beginning) of RIL’s petroleum coke (pet coke) gasifier has been delayed by six months to January 2018. This, in turn, will delay optimum earnings for RIL’s off-gas cracker, which will start by March 2017.

“While pet coke gasification is delayed by six months, our FY18 earnings (profit) reduce marginally by three per cent as we had already factored in some delay,” says Harshad Borawake, oil and gas analyst at Motilal Oswal Securities.

The other factor pertains to its Jio (new telecom entrant), and the huge investments RIL has made in it. Till date, the company has spent a whopping Rs 1.59 lakh crore in this business and the management is not ruling out this figure rising to Rs 2.5 lakh crore by 2020.

Despite these investments, there is uncertainty on the commercial roll-out of Jio services as the management awaits resolution of the interconnect issues (inter-connectivity with other operators), which is hampering its services. Additionally, with existing players trying to give Jio a tough fight, it will be important to watch out if RIL is able to retain a large part of its subscribers after discontinuation of free services after December 31.

“After trial run, conversion of billable customers in Reliance Jio would be the critical factor to watch out for, as that would influence the profitability of the telecom business,” wrote analysts at Sharekhan in a post-results report on the company.

Some analysts are also concerned about how RIL will capitalise the huge capex incurred towards Jio. “The management indicated that capitalisation of Jio and, thereby, accounting of expected initial losses will depend on performance of the business,” analysts at Kotak Institutional Equities wrote in a recent note on the company.

Simply put, as these start reflecting in RIL’s financial statements, it could lead to some pressure on consolidated profit figure, say analysts.

These concerns are justified as diversification into multiple businesses such as retail, media and entertainment has not yielded much return for RIL so far. This is well reflected in the firm’s consolidated net profit, which has lagged that of its core standalone (oil and gas) net profit in the past two quarters. In fact, its core standalone business accounted for 98-99 per cent of consolidated net profit in quarters when the the consolidated net profit exceeded the core standalone net profit.

Together, the existing refining and petrochemicals businesses generate most of the cash, which RIL has been deploying to nurture other businesses. And, the core businesses are crucial for the company's prospects. Investment in various businesses so far has restricted RIL’s consolidated return on equity to 12 per cent and this is expected to fall further to 10.7 per cent in FY18, according to Bloomberg consensus estimate, largely due to the estimated initial losses in telecom business.

Against this backdrop, starting of new capacities and completion of capex in its core petrochemicals and refining businesses are crucial and will aid RIL’s free cash flow. Likewise, clarity around a smooth commercial launch of Jio as well as the management’s success in achieving healthy profit in the telecom business will be a key catalyst for the stock. Hopefully, there will be more clarity in the next few quarters.