Reliance Industries Ltd (RIL) ended FY23 on a good note. Reported consolidated net profit for the year hit a record high 74,088 crores. In addition, analysts at Jefferies India said year-on-year (y-o-y) cash flows from Reliance Jio’s operations in FY23 grew due to limited working capital inflows. Due to this, Jio gave the highest ever free cash flow in FY23. 6,700 crore despite an increase in cash capital expenditure (capex), he added.
While RIL’s overall March quarter (Q4FY23) results were broadly in line with Street estimates, Jio and the company’s oil-to-chemicals (O2C) business performed well. The performance of the O2C business was helped by improved refining and petrochemical margins. In Jio’s case, the net subscriber addition was good in the last quarter. Average revenue per user (Arpu) was flat sequentially in Q4, despite the lower number of days. This bodes well for the ARPU outlook of Bharti Airtel Limited and Vodafone Idea Limited for the quarter.
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To be sure, the outlook on tariff hike is bleak. RIL expects Arpu to expand from higher data consumption with 5G, which means a tariff hike is still some time away. Some analysts say it will be difficult to raise tariffs before a general election in 2024.
Coming to RIL’s retail segment, the vertical witnessed healthy store additions. The segment’s store area grew nearly 58% year-over-year in Q4 to 65.6 million square feet. But revenue per square foot grew only 19%, meaning a decline in revenue.
Meanwhile, despite strong earnings for FY23, investors were not impressed. On Monday, the company’s shares barely budged, closing up only 0.4%. “Rising debt levels and capex appear to be a sore point,” said an analyst with a multinational brokerage firm, requesting anonymity. RIL’s consolidated net debt as on March 31 was 1.1 trillion, up 18% over the last six months. However, it is encouraging that RIL continues to maintain its net debt to EBITDA ratio below 1. In FY2023, RIL’s net debt to EBITDA ratio was less than 1. In addition, capex remains high. In Q4, consolidated capex stood at 44,400 crore, taking the total amount for FY23 to a multi-year high 1.42 trillion (excluding the amount spent for spectrum and capital advances). Analysts estimate that the bulk of the capex incurred by RIL in FY23 has been in the Jio and retail segments. RIL in its presentation said that the investment during FY23 is aimed at capturing a greater share of the consumer wallet. “We expect consumer business capex to decline from the second half of FY2024, while the benefits of large capex should start trickling in from FY25,” said analysts at JP Morgan India.
RIL shares are down about 17% from their 52-week high seen in April last year. The delay in tariff hike has been a cause of concern in the telecom business, apart from rising capex and debt levels. According to analysts at JP Morgan, continued selling by foreign institutional investors remains a major headwind for the stock in the near term.
The good thing is that the valuations look reasonable. “Forward Ebitda multiples are at their lowest since Covid, and at a discount to 5-year averages,” analysts at Jefferies said in a report.
Going forward, how demand from China shapes up is a key watch for the O2C business. The slowing trend in domestic consumption could have an impact on RIL’s consumer business.
“In our view, the outcome is not a significant stock price driver. The near-term drivers are capex and potential unlocking from the spin-off of its financial arm Jio Financial Services (ZFS),” wrote Sachin Salgaonkar of BOFA Securities.
“We expect more visibility on ZFS and business updates at the AGM (likely in July/August),” he added.
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