Deleveraging, lower capex and ARPU rise to aid RIL's earnings growth

The growth expectations and further rerating hinge on its consumer businesses — Jio Platforms/Reliance Jio and Reliance Retail
Reliance Industries' (RIL's) stock surged 6.2 per cent in trade on Friday and closed at its lifetime high of Rs 1,759.50 after the company announced it had become net-debt free post the slew of investments in Jio Platforms and the completion of its rights issue. On the back of a price surge, the stock has more than doubled since its lows in March.

The reason the stock has rerated is the earnings boost lower debt will have on the financials. The interest outgo for FY20 for the consolidated entity at over Rs 22,000 crore grew 33 per cent over the year-ago period. Further deleveraging will depend on the progress of the 20 per cent stake sale in the oil-to-chemicals segment to Aramco for Rs 1.14 trillion and monetisation of fibre and tower assets. If the deals go through, the company will be debt free even at the gross level. Although a few analysts have pegged the debt higher, these fundraising initiatives would still mean a sharp cut in overall leverage. While earnings growth, given the Covid-19 pandemic and a weak oil & gas vertical, could be hit in the near term, positive for the company is that capex intensity is behind it. Capex for FY20 was at Rs 76,000 crore and is expected to slide by over 40 per cent to around

the Rs 45,000-mark in FY21 which should help boost free cashflows.

Though the deleveraging news has helped the stock cross the record market capitalisation of Rs 11 trillion, experts say it has more legs to run as investors chase digital growth options. Sanjiv Bhasin, director at IIFL, says: “Globally, many people are unwilling to re-invest in China. So, India would see more flow, where RIL stands out given the improved return on equity and strong growth expectations.” He expects the stock to hit the Rs 2,000 per share level by March 2021, which denotes an upside of 14 per cent from the current levels. The growth expectations and further rerating hinge on its consumer businesses — Jio Platforms/Reliance Jio and Reliance Retail. Within the two, Jio — which is the market leader both by revenue and subscribers — is expected to be the growth engine. The triggers for the telecom business, according to Hemang Jani, head equity strategist, Broking & Distribution, Motilal Oswal Financial Services, is increase in average revenue per user (ARPU) and market share gains in the 4G segment. Analysts expect APRU growth to the tune of 20 per cent (Rs 150 plus) over the next two years from the current levels of Rs 127. Harshvardhan Dole of IIFL Research estimates that a Rs 10 improvement in ARPU could add Rs 45 per share increment to the valuations of RIL.

The other key piece of the growth strategy is retail, including the business from Jio Platforms. Analysts at Goldman Sachs believe the initial growth (operating profit growth to increase by 3 times over FY20-25) will be driven by margin improvement and private label contribution in the brick and mortar grocery business. It expects gains from JioMart to kick in after being a drag on profitability in the FY21-23 period as the company moves from being an offline market player (11,000 stores) to an integrated offline to online player powered by an e-commerce platform. Gaurav Dua, head capital market strategy at Sharekhan, believes that RIL will repeat the success story of Jio in the retail business as well. Further, given JioMart’s unique business model, it is well placed to face competition from online players, such as Amazon.

Given the two growth engines, it is no surprise that the retail and telecom businesses are expected to contribute 53 per cent of operating profit by FY23, from around 14 per cent in FY18, and a third in FY20.

The uptick from the consumer businesses could not have come at a better time as Moody’s Investors Service expects consolidated operating profit for RIL to fall 16-17 per cent in FY21 on account of the Covid-19 pandemic. “Profit for the refining and petrochemical segments is expected to be weaker as the standstill in global travel and the slowdown in economic activity will weaken the demand for transportation fuel and petrochemicals,” says the credit rating firm.

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