Jio, retail growth to keep investors hooked to RIL

ET Intelligence Group: Reliance Industries, India’s largest private sector by profit, is likely to outperform given its core business segment—refining and petrochemical— stayed steady for the September quarter meeting street expectations while robust growth of the consumer-facing business—retail and RJio— would boost the stock.

In the September quarter, the operating profit share of the consumer business jumped to 20 per cent of the total consolidated profit from just 4.8 per cent in the same quarter last year. Furthermore, the acquisition of the controlling stake in the Hathway and DEN Networks will help the tap the sizeable untapped broadband market.

This could help boost the valuation of the RJio. RIL’s stock has outperformed the benchmark Sensex by 9 per cent in the past three months in choppy trade. Based on the September quarter results, the earnings estimate and ascribed valuation multiple for the retail business is likely to be revised upwards. This could lift the consensus target price for RIL.

In its core business, the softness in the Singapore refining margin—a gauge of regional refining margin—has been reflected in the company’s refining margin, which was at $6.0 per barrel in September quarter.

The gross refining margin—the difference between crude oil cost and average selling price of refining products—dropped to $9.5 per barrel in the September quarter from $10.5 in the previous quarter due to the adverse light-heavy crude differential, lower product realisation and shutdown of one unit.


The premium of RIL’s GRM to the Singapore refining margin dropped $3.4 per barrel from an average premium of $4-4.5. Despite the fall in the GRM, operating profit of the refining segment grew 0.1 per cent to Rs 5,322 crore on a sequential basis thanks to higher throughput rising 7 per cent Q-o-Q to 17.7 mmt.

The higher feedstock prices and lower realisation in some petrochemical products lowered profitability of the petrochemical segment and operating profit margin dropped 70 basis points on a sequential basis to 18.8 per cent. With record absolute operating profit in the September quarter, the share of the petrochemical segment to the total operating was nearly 50 per cent.

There are ample growth triggers for earnings growth of the refining and petrochemical segment. RIL’s GRM is likely to improve on higher utilisation of pet coke gasification project which could potentially increase by $2-2.5 per barrel if crude prices continue to remain elevated. New International Marine Organisation rule for cleaner fuel could also improve realisation for the complex refiner.

Margins of the petrochemical segment margin were impacted due to rising prices of ethane in the international market. However, RIL has hedged an undisclosed quantum of ethane purchases up to December 2020.

The retail business revenue grew 25 per cent sequentially and 121 per cent on a yearly basis surprising the street. This is triple-digit growth on YoY basis for the fourth quarter running.

In the first half of the FY19, the total revenue of retail business revenue reached Rs 58,326 crore and if the company maintains the current quarterly rate in the remaining of the two quarters of the current fiscal revenue may cross Rs 1 lakh crore. The street is pencilling in revenue of Rs 1 lakh crore for the next fiscal year. The street is valuing retail business for Rs 140-160 per share and valuation multiples are lower than its peers.

In the September quarter, RJio added 37 million subscribers compared with 28.7 million in the previous quarter and average revenue per user dropped to Rs 131.7 from Rs 135.

The trend is likely to continue as strategy precedence of customer acquisition over the margins will likely stay till it reaches critical mass in the subscriber and revenue market share. The controlling stake in cable operator for the fourth quarter for the fourth quarter and Den Network will support the penetration of the JioFibre—fibre-based broadband service. Hathway and Den Networks offer broadband services with nearly 6.5m homes and a combined broadband subscriber base of 0.9m.