Shares of Reliance Industries Ltd (RIL) were down more than 2% on Monday on the National Stock Exchange following the oil-to-telecom conglomerate’s June quarterly earnings that showed results largely matching expectations, with its Ebitda (Ebitda is earnings before interest, tax, depreciation, and amortization) at ₹38,093 crore, essentially flat year-on-year (YoY) and sequentially. Revenues at ₹2.07 trillion were down 5% YoY.
Analysts have cut earnings estimates of the company. “We have lowered FY24/25E Ebitda 1-2% on tariff hike delays in Reliance Jio and slower growth in Retail,” said analysts at Jefferies India in a report on 22 July.
Analysts at Kotak Institutional Equities have also lowered their FY2024-25E consolidated Ebitda by about 1% each, largely on the back of 4-5% cut in Ebitda of Reliance Retail.
Note that RIL’s retail and digital services businesses saw year-on-year growth in revenue. The retail business saw a 42% increase in footfalls in Q1 and 43% rise in the number of transactions. Even so, store throughput contracted to a multi-quarter low, note analysts at Jefferies. “Reliance Retail remains the retail leader but better disclosure would help if RIL intends to list the business separately in the foreseeable future,” added Jefferies.
As such, RIL’s oil to chemicals (O2C) was the key driver of the company’s subdued consolidated revenue. O2C revenue fell nearly 18% year-on-year as demand was hurt by destocking on recessionary fears and high interest rates. A slower-than-expected ramp up in China markets also weighed on demand. Investors would do well to track RIL’s O2C business going ahead. Subdued global demand coupled with increased supply from China may affect Indian downstream export to US and Europe. In the case of Jio, all eyes would be on 5G roll-out.
Meanwhile, RIL’s capital expenditure (capex) remained high in Q1 at ₹39,645 crore, even as it fell 10.7% sequentially. Consolidated reported net debt was slightly higher sequentially at ₹126,621 crore. However, analysts are not perturbed much.
“We believe concerns on debt are overdone as we expect RIL’s net debt to peak in FY24 and then decline gradually as capex will not only moderate ( ₹1.2-1.4 trillion p.a. versus ₹2.3 trillion in FY23) but, importantly, also be fully funded by a gradual increase in internal cash generation,” said analysts at JM Financial Institutional Securities in a report on 22 July.
Kotak’s analysts concur. “We expect that capex intensity to moderate with completion of 5G rollout in the next few quarters and also with the slowdown in recent pace of fast retail space expansion. Thus, we continue to believe that net debt levels have likely peaked,” they said in a report on 23 July.
Moreover, it is encouraging that RIL intends to keep net debt to Ebitda ratio below 1x
Against this backdrop, RIL shares trade near their 52-week high of ₹2,856 apiece. However, with limited near-term catalysts following the recent rally, RIL’s stock may not have many triggers for further upsides.