RIL's earnings parity expected by FY22 in consumer, core business

Most of the earnings growth for Reliance Industries (RIL) in the quarter ended December 2019 was from its consumer businesses — retail and digital. 

The major chunk still comes from its core business. This contributed a little less than 60 per cent of earnings before interest, taxation, depreciation and amortisation (Ebitda). This, nonetheless, could change rapidly. Some expect the core business share to fall to 50 per cent by the end of 2021-22. The contribution from core businesses — oil, petrochemicals, refining — was 71 per cent only a year before.

Chairman and Managing Director Mukesh Ambani’s speech to shareholders and analyst estimates both suggest this is expected to fall drastically as the consumer business grows further.

“With the current pace of growth for both retail and telecom, it is a matter of one or two years, before there is equal contribution from the core and the consumer business. I expect the 50 per cent earning contribution to happen in FY21 or latest FY22,” said an analyst, who did not wish to be identified. 

At the annual general meeting in September 2016, Ambani had said: “I am confident our consumer businesses will, over several years, be of the same size and earnings as our petrochemicals and refining business.” In 2015-16, the contribution from telecom and retailing to overall earnings was only 2 per cent. “The contribution share from consumer business is expected to continue to rise and would most likely achieve parity with the oil to chemicals (O2C) business possibly by FY22,” said Nitin Tiwari, vice-president at Antique Stock Broking. 

Ambani’s timeline guidance has also shrunk since 2016. In his latest chairman’s speech, in August 2019, he  said: “The day is not far when their (two consumer businesses) share would be 50 per cent (to consolidated Ebitda).”

Analysts have also been changing their earnings estimates positively for the consumer business. In its older estimates, Jefferies pegged RIL’s telecom Ebitda at Rs 33,000 crore and retail one at Rs 14,800 crore for FY22. These estimates have been revised to Rs 46,500 crore and Rs 16,200 crore, respectively. In sum, the consumer business is expected to contribute at least 45 per cent to total earnings in FY22. 

Analysts with BNP Paribas, in a results preview report titled ‘Jio and Retail are now core businesses’, said: “We estimate Jio and retail to contribute 35 per cent to the FY20 Ebitda and increase to 46 per cent by FY22. This growth, we believe, will be driven by higher average revenue per user and subscriber additions at Jio, and continued strength in consumer retail as RIL now begins to benefit from scale.”

Tiwari from Antique said growth in the retail business has surprised the Street over several quarters. “While performance of the telecom business has started to look up from this quarter, retail continues to surprise with revenue and margin expansion for some time.”

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