Jio to drive Reliance Industries' March quarter Ebitda, say analysts

On consolidated basis, last year's low base expected to aid sharp jump in net profit

Mukesh Ambani-led Reliance Industries (RIL) is expected to witness an increase of 8 per cent (on average) in its consolidated earnings before interest, tax, depreciation, and amortisation (Ebitda) in the March quarter (Q4), led by strong improvement in the profit of Jio, its telecom business.
 
Jio’s Ebitda is seen rising 34.4 per cent YoY and 6 per cent sequentially, led by a rise in subscriber base to 421 million (33 million jump YoY; 10 million sequentially) and ex-IUC ARPUs (average revenue per unit) to Rs 144 per month.
 
IUC is a cost paid by one mobile telecom operator to another when its customers make outgoing calls. As IUC would be absent in Q4 of financial year 2020-21 (FY21), reported revenues, however, would be down sequentially. They are estimated to rise over 17 per cent YoY.
 
Jio offers a slew of prepaid plans with the option of buying an additional IUC top-up. Given these sharp gains, Jio is expected to account for 38-40 per cent of RIL’s consolidated Ebitda in Q4’FY21 as against 29 per cent a year ago.
 
Most analysts expect RIL’s consolidated top line to grow in the single-digits in Q4’FY21 over last year, with a handful expecting it to rise between 13-17 per cent. The net profit, however, is expected to rise 78-141 per cent. Apart from the gains in Jio, the surge in bottom line will be driven by the year-ago quarter’s low base, which was impacted by exceptional items of Rs 4,267 crore. In the O2C (oil-to-chemical) business, while the profit is estimated to be down year-on-year (YoY), analysts see good recovery in petrochemical and refining margins compared to the December 2020 quarter. “We estimate GRMs (gross refining margins) to increase sequentially, led by better diesel and gasoline cracks,” said Edelweiss, which estimates O2C Ebitda to rise 23.8 per cent sequentially and decline 3.8 per cent YoY.

 
“We expect 8 per cent sequential increase in O2C business Ebitda, driven by higher volumes and margins for both refining and petrochemical segments,” said Kotak Institutional Equities (KIE).
 
The sequential improvement would have been better but for the company’s planned maintenance of its refinery in Q4, said analysts. In the retail business, the expectations are a bit mixed.
 
“The retail business is expected to be up by more than Rs 400 crore quarter-on-quarter on the back of sustained recovery in revenues and margins,” said analysts at KIE. However, some brokerages are also cautious. We expect trends to be mixed in Q4, given the return of lockdowns in some states, said Goldman Sachs analysts.
 
Overall, analysts say, while many companies are impacted by the Covid-19 surge across the globe, RIL is not expected to see significant impact on its Q4 earnings.
 
“We note RIL earnings are linked to global recovery for O2C, which is tracking well, while its India consumption exposure is more defensive for telecom and retail. Hence, we do not expect material earnings impact from the recent Covid wave for RIL,” said analysts at Goldman Sachs in a report.
 
However, for FY22, brokerages are a tad cautious on the near-term prospects of RIL, even as many remain positive on the stock. With global refining capacity rationalisation having paused in recent months, a return to pre-pandemic utilisation and profitability levels remains unlikely in 2021, said Citi Research, which is neutral on RIL with a target price of Rs 2,220.
 
“About 96 per cent of RIL stores were operational in Q3 as against 50 per cent and 85 per cent in Q1 and Q2. This sustained recovery could reverse in Q1FY22, which could weigh on segmental profitability,” said Citi report.

 
Goldman Sachs, which has a ‘Buy’ rating on RIL with a target price of Rs 2,405, on the other hand, foresees strong cash generation with declining capex intensity driving free cash flow yields of 8 per cent and 7 per cent for FY22 and FY23, respectively. In retail, online penetration is expected to continue, said brokerages.
 
“On average private labels on JioMart are 36 per cent cheaper than brands in personal care, 20 per cent in homecare and 20 per cent in packaged foods and beverages,” the Goldman Sachs report said.
 
Last but not the least, subscriber additions should pick up for the telecom business following the new JioPhone offer in March, said Citi Research in its report. This should continue aiding RIL’s numbers in FY22.
 
Management commentary on these key businesses will be keenly watched, especially on refining margins, tariff hikes in telecom and traction in retail business. And, also on RIL’s stake sale plan in the demerged O2C business.