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RIL to consider rights issue, announce Q4 nos today. What to expect?

A company typically turns to a rights offering when they need capital
Reliance Industries (RIL) on Monday announced that its board would consider a proposal to issue equity shares to existing shareholders on a rights basis during its board meeting on April 30 (Thursday). That apart, the company will also announce its results for the quarter ended March 2020 (Q4FY20) on the same day.

According to analysts, the company's decision to consider rights issue is unexpected; however, considering that the equity markets may not do well in the near-term due to Covid-19 crisis, the company may have resorted to the rights issue to raise money.

"RIL may be worried about the time of the completion of the two mega-deals that it has announced in the last 7-8 months (Saudi Aramco deal and Facebook deal), and their debt-reduction plan could be delayed; hence, rights issue could be an ideal option for them to fund their capex and cut debt given that the hitherto cash cow of Oil & Gas and Petrochem businesses may face tough times for a few months," opines Deepak Jasani, Head of Research at HDFC Securities.

In August 2019, Group Chairman and Managing Director Mukesh Ambani told shareholders that RIL would be a zero-net debt company before March 2021. READ MORE

A company typically turns to a rights offering when they need capital. It is an invitation to existing shareholders to buy additional new shares of the company at a price that is usually lower than the current price of the stock.

As things stand, most analysts suggest it would be advisable to subscribe to the rights issue given that the company is on a firm footing, a final call, they said, would be easier to take when the details are announced. However, they do caution that a large issue could dampen sentiment in the short-term.

"If the size of the rights issue is 5 per cent or 10 per cent, then it is okay. Beyond that, it will help the company reduce debt but then it will be negative for the investors. Markets cannot take excess supplies at this point in time," said A K Prabhakar, head of research at IDBI Capital. “If they keep the size of the issue lower, the supply will be absorbed – and both the company, as well as the shareholders, will benefit,” Prabhakar added.

From the investors' point of view, Ajay Bodke, CEO-PMS at Prabhudas Lilladher said: "With consumer-focusing businesses like digital telecom and retail achieving global scale and global behemoths vying with each other to partner RIL; this is an apt opportunity for current shareholders to participate in the likely value unlocking of various businesses over the next couple of years.”

Expectations from Q4 results

RIL's oil and gas business is expected to take a steep hit with a sharp drop in gross refining margins (GRMs), thanks to the carnage in oil prices due to the Covid-19 outbreak. Non-energy businesses (retail and telecom) are, however, expected to save the day.

Edelweiss Securities expects revenues to decline 4.6 per cent year-on-year (YoY) and 13.5 per cent quarter-on-quarter (QoQ) to Rs 132,277.6 crore. The brokerage expects GRM to decline 21.7 per cent QoQ at $7.2/barrel (bbl) due to weaker cracks across distillates. Consolidated EBITDA (earnings before interest, taxes, depreciation, and amortisation) is expected to decline 3 per cent QoQ to Rs 21,717.4 crore. On YoY basis, the numbers will grow 4.3 per cent.

"Petchem margins will improve QoQ due to higher olefin spreads. Reliance Jio EBITDA will increase driven by subscriber additions (20 million in Q4) and higher average revenue per user ARPU (Rs 135) while retail will decline due to seasonal weakness and COVID-led lockdown," the brokerage notes in an earnings preview note. 

PAT (profit after tax) is seen at Rs 10,660 crore, down 8.4 per cent QoQ and up 2.9 per cent on YoY basis.

Analysts at Kotak Securities expect the company's standalone EBITDA to decline sharply on a sequential basis due to lower refining margins at $7.2/bbl (-US$2/bbl qoq) amid weaker product spreads and lower overall margins for petchem segment.

They expect net sales (revenues) to grow 11.8 per cent YoY and 1.3 per cent QoQ to Rs 154,958.6 crore. PAT is seen at Rs 10,009 crore, down 3.4 per cent YoY and 14 per cent QoQ. EBITDA margin is expected to decline 175 bps YoY and 137 bps QoQ at 13.3 per cent.

“Lower standalone contribution will be partly mitigated by higher Jio EBITDA (+Rs 780 crore QoQ) led by a rise in subscriber base to 390 million (+20 million QoQ) and ARPU to Rs135/month (+Rs 7 QoQ); retail EBITDA may remain steady QoQ," the brokerage said.

Centrum Broking projects RIL's GRMs to decline $1.2/bbl on quarter-on-quarter (QoQ) basis and a 31 per cent/7 per cent YoY/QoQ dip in Petchem EBIT. However, continued strength in Reliance JIO (EBIT +40% yoy) and Retail (EBIT +40%) will help EBITDA/PAT (consol) grow 2% YoY each, it added.

At the bourses, shares of RIL have declined over 26 per cent during the quarter under review as compared to over 28 per cent slide in the benchmark S&P BSE Sensex.

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