Notes from RIL results

Several trends are worth noting when we examine the Q1, 2019-20 numbers for Reliance Industries (RIL). Retail plus digital together contributed over 22 per cent of revenues for the giant flagship of the Mukesh Ambani group. Fast growth in these two segments compensated for stagnation in the core petrochemicals and refining segments.

Jio’s synergies with Reliance Retail makes it a unique online-offline play. The telecom subsidiary is now the largest telco in terms of subscriber base. But it may have dropped behind Airtel in terms of Average Revenue Per User (ARPU).

The telecom sector was disappointed by the Budget and by 5G policy. The industry wanted infrastructure status in the Budget. This would mean duty waivers for imports. Instead, customs duty on optic fibre has been hiked. The industry also wanted clarity on service tax chargeable on recharge coupons and it is lobbying for reduction of GST on tariffs, from 18 per cent to 12 per cent. It was also lobbying for a reduction in base prices for the 5G spectrum due for auction this year. None of this has materialised.

Reliance Jio and Vodafone Idea have declared results so far among the telecom service providers. Jio had 331.3 million subscribers by end-June 2019, and Vodafone Idea had 320 million subscribers. While Airtel’s June numbers are not available yet, it had 320.38 million users at the end of May. 

Jio’s ARPU of Rs 122 in Q1, 2019-20 was lower than its ARPU of Rs 126 in January-March 2019 and lower than Rs 130 in October-December 2018.  ARPU has declined continuously since the Oct-Dec 2017 peak of Rs 154.  VIL improved respective ARPUs across October-December 2018 through April-June 2019, from lower bases. In January-March 2019, Airtel had an ARPU of Rs 123 while VIL had ARPU of Rs 108 in June quarter. Airtel’s ARPU may have overtaken Jio in Q1, 2019-20.

Jio’s net profit climbed 46 per cent year-on-year to Rs 891 crore, beating consensus estimates of Rs 800 crore. The revenue at Rs 11,679 crore grew 5 per cent sequentially over Q4, 2018-19. But analysts have drawn attention to a boost in profits from adopting the new Ind-AS 116 accounting standard. Ind-AS 116 allows companies to recognise tower leases as assets in the balance sheet. So the lease rental payout can be shown as depreciation, pushing up Ebitda. Jio also had lower net interconnect payouts (a natural consequence of larger subscriber base) and lower employee costs.  

The RIL petrochemicals segment is down, in both volumes and profitability. Refining has seen some volume growth. But the Gross Refining Margin (GRM) is the lowest in 18 quarters, and GRM has now fallen for eight successive quarters. GRM varies inversely with crude prices; lower crude costs lead to higher GRM. Crude prices were 6-7 per cent higher during April-June 2019, compared to January-March 2019. As demand was also flat, RIL’s refining and petrochem segments had a tough time.

The telecom market is near saturation. Lack of policy change implies debt servicing pressures remain high. VIL’s results indicate downtrading by customers to cheaper plans with its revenue falling below Jio’s. However, we can’t make a judgement call until Airtel releases Q1 results. VIL and Airtel have both pursued a strategy of shedding low ARPU users, and focused on converting voice-only 2G users to data plans. It is a strategy born of desperation. But it may have worked in boosting ARPUs for both, although it has allowed Jio to gain subscriber market share while reducing ARPU.

Refining and petrochem are commodity businesses. We may safely assume the GRM trends will be similar for RIL and for PSUs in the refining-marketing business. RIL has more efficient refineries (and crackers) than BPCL, HPCL and Indian Oil but GRMs will trend in the same direction. RIL also has more flexibility in terms of exports.

If RIL’s refining segment had a tough quarter, the results of the PSUs would certainly be worse. They can’t export, and they have the additional problem of coping with an owner more intent on dividend extraction, than on maintaining profitability. The market response to RIL’s results has been negative. The stock price has fallen and most brokerages have cut price targets.

The PSUs could get hit even harder by disappointed investors. Balanced against this, global crude prices could settle lower if the Iran-US confrontation eases off. That could mean a GRM bounce even if demand remains flat.


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