What will it take for RIL stock to stop underperforming D-Street

NEW DELHI: Reliance Industries (RIL) profit beat in the June quarter was largely led by oil-to-chemicals (O2C) and upstream businesses and a slight beat by Jio, even as the retail business took a bigger-than-expected hit from the second Covid wave.

Following its quarterly earnings, analysts raised earnings estimates for the oil-to-telecom major by 3-5 per cent, but largely retained their price targets. They believe upsides for the stock will fairly be limited unless there is a tariff hike, recovery in gross refining margin and growth is back in the retail segment to the pre-Covid levels.

On Monday, the stock fell 0.7 per cent to hit a low of Rs 2,089 on BSE. The stock has dropped 3 per cent in the last one year compared with a 40 per cent rise in the Sensex.

ICICI Securities said the RIL stock is underperforming the market since the middle of September 2020 and is also lagging peers across businesses.

“The petrochemical margins are already down from the peak, and large capacity additions in products that account for 70 per cent of RIL’s volumes may mean further correction. Diesel cracks’ rise to pre-Covid levels is key to GRM recovery but, with only 3.6 million of barrels per day (b/d) refinery closures announced against 6 mb/d needed, recovery is likely to be slow,” it said.

June quarter's retail Ebitda was down 55 per cent sequentially and a possible third wave may mean retail growth would be back to pre-Covid levels only in FY23, ICICI Securities said.

Besides, “a tariff hike and return of retail growth to pre-Covid levels in FY23 may cause the stock performance to improve, the brokerage said and suggested a price target of Rs 2,017 on the stock.”

On the positive side, RIL’s operating performance for the quarter exhibited limited impact from the second Covid wave across all business segments, except for retail.

Kotak Institutional Equities said Jio’s net subscriber additions were fairly strong at 1.43 crore despite Covid-related restrictions. The O2C segment feedstock throughput increased modestly to 19 million tonnes with realised margins being better despite a higher share of exports, it added.

"We raise FY22-24 consolidated EPS estimates by 3-4 per cent factoring in Q1FY22 performance, higher other income, lower finance cost and other minor changes. Our FY24 Ebitda estimates remain largely unchanged. We retain an 'add' rating on the stock, noting a robust earnings growth trajectory,” it said. This brokerage has a price target of Rs 2,260 on the stock.

Nomura India has retained its target price of Rs 2,400. It values RIL’s core refining and petchem businesses at 7-8 times FY22-23 EV/Ebitda. It sees R-Jio at 11 times FY22-23 EV/Ebitda. Reliance Retail is valued at 27 times FY22F-23 blended EV/Ebitda.

"After a relatively subdued June quarter, we expect each of the key segments to improve. The O2C segment should benefit from gradually rising refining margins and domestic demand revival. The E&P segment would get a boost from a likely sharp price increase in the second half, and further ramp-up in production,” Nomura said.

"We expect retail to benefit from a revival of footfalls, new store openings, and rising share of new commerce. For Jio, subs addition remains robust and should get a boost from Jiophone Next launch, but tariff hike remains a key trigger but it seems pushed out,” it said.

Edelweiss sees things improving, and expects the upstream business to drive Rs 10,000 crore Ebitda growth by FY23. It said refining margins may recover going ahead.

“RIL’s latest Rs 75,000 crore ‘path-breaking new energy investment plan’ for green hydrogen and fuel cells should enable the O2C business to become carbon neutral by 2035,” it said and raised the stock's target by 3 per cent to Rs 2,175 at 9.7 times EV/Ebitda. That target suggests little upside.

The Mukesh Ambani-led company reported a consolidated net profit of Rs 13,806 crore for the first quarter, up 66.7 per cent from Rs 8,282 crore a year ago. The increase becomes 4.2 per cent after including exceptional items that took the bottom line for the first quarter last year to Rs 13,248 crore.

Total consolidated revenue came in at Rs 1.59 lakh crore in the June quarter, up 57.4 per cent from the same period a year ago.