Key Takeaways from the RIL Q4 Result

The Reliance stock has been on a tear at the bourses for quite some time now. In fact, the stock is already quoting at a 9-year high and hence the expectations were pretty high ahead of the fourth quarter results. Here are some of the key takeaways from the Reliance Q4 results.

Key takeaways from the RIL Q4 results…

•    The RIL revenues for the fourth quarter at Rs.92,889 crore was up by 45% over the fourth quarter 2016. This could be largely attributed to the price of crude oil which has moved up from around the $30/bbl mark in March 2016 to above $50/bbl in March 2017. On a full year basis, the revenues of RIL were up by 12.6% at Rs.330,180 crore.

•    Net profits for the fourth quarter at Rs.8046 crore came in almost 12% higher than the corresponding quarter last year. However, on a full year basis, the net profit was almost static at the level of Rs.29,900 crore, almost at the same level as the previous fiscal year. This leaves the full year EPS at around Rs.102, valuing the company at around 14 times rolling earnings. This is at par with the valuations that RIL has historically quoted at.

•    The key driver for the net profits this quarter was the strong Gross Refining Margins (GRM). At $11.5/bbl, the GRM of RIL is nearly $5/bbl higher than the Singapore benchmark GRM. That has contributed substantially to the profitability of the company. The GRM of $11.5/bbl for the fourth quarter is not only higher than the $!0.8 recorded in the third quarter but also higher than the consensus estimate of $10.5/bbl.

•    Other than refining which has been the staple of growth for RIL, petrochemical margins have also been robust. The petchem margins at 14% are the best that RIL has achieved in the past. While the revenues of the petchem business was up by 25% on the back of higher price realizations, the EBITDA was also up by 26% on the back of healthy petchem margins achieved by the company.

•    The oil extraction business continues to be under pressure due to weak price environment. Revenues for the oil and gas extraction business were down by 20% on a YOY basis, largely on the back of weak prices. Also, due to weak prices, most oil wells of RIL are facing under-recoveries due to sub-optimal pricing on oil and gas. In fact, over the last few years, RIL had actually invested nearly $9 billion in buying out shale gas properties in the US. However, due to unattractive pricing, RIL is in the process of hiving off some of its wells.

•    The company’s organized retail segment also clocked over Rs.10,000 crore in the form of quarterly revenues, largely driven by growth across all segments. The retail business of RIL owns 3616 stores across 702 Indian cities and covers an area of over 13.5 million square feet. That makes Reliance Retail one of the most formidable retail plays in India in terms of size and reach. Post the attractive valuations assigned to D-Mart, the retail business is also expected to contribute significantly to the overall valuations of RIL.

•    Reliance Jio is that segment of the company’s business that has attracted most of the attention and eyeballs during the last 6 months. That is hardly surprising! In fact, Reliance Jio has already crossed the 100 million subscriber mark in less than 6 months. It is not just about top-line. Its proposed 303 plan is likely to ensure best-in-class ARPU for Reliance Jio, positioning the company at a distinct advantage vis-à-vis other telecom players in the industry. The company is adding customers at the rate of 6 lakh customers per day and that will surely give the company a formidable position in the next couple of years.

•    Finally, the big question remains on the Return on Investment (ROI) of the outlays in telecom. The company has already sunk in close to $30 billion into the telecom business. Being a high-gestation business, it is not yet clear when actually the payback period for the telecom business will start. Sooner, rather than later, the company will have to contend with some tricky questions. For the last few years, the company undertook heavy capital investments in the oil & gas space. That is beginning to pay off for the company due to improved GRMs and sustained petchem margins. Can telecom return that favour?

The big challenge now for RIL will be to convince its retail and institutional shareholder that sinking the profits of the oil business into telecom is a good business idea. Of course, the larger goal of the company is to disrupt the telecom sector and own the customer in such a way that most of the incremental revenues accrue to RIL. If that happens, then it could be a gamble on telecom that would have paid off handsomely for RIL.