RIL’s retail power draws wholesale money to its stock | Economic Times

ET Intelligence Group: Reliance Industries (RIL) is not only India’s most valuable company or the biggest by standard financial metrics, but it also has the largest weighting on the index and has led the stock market’s rebound since March. September just reinforced those leadership credentials.So, earnings growth projections at the telecoms-to-retail conglomerate will likely be raised after a quicker-than-expected sequential recovery across revenue streams — both consumer-facing and B2B.Consumer-facing businesses now make up about half of RIL’s operating profit, surging from about a third a year ago. This explains the stock’s re-rating – and premium valuations for an energy giant in transformation.To be sure, the near-term performance of RIL will be supported by earnings upgrade in the consumer business, but wide outperformance will hinge on earnings recovery at its traditional oil-to-chemicals businesses. Before the earnings, the Bloomberg consensus target price on RIL implied 7% upside in the next year.78963938Business Expands, Debt ShrinksA rising share of the high-growth consumer business and a deleveraged balance sheet have helped RIL expand its valuation multiples, drawing the biggest names in the global investment industry. Foreign portfolio investors raised their stake in RIL to 25.20% at the end of September, compared with 24.72% in the preceding quarter.More could be waiting in the queue, but the regulatory ceiling on ownership has remained at 10%, while RIL’s weight in the Nifty touched 14.9% at September end, translating into a gain of 514 bps since the beginning of 2020.The telecom business, which contributes nearly a third to RIL’s total fair value, added 7.3 million subscribers. The average revenue per user (ARPU) rose 3.3% to Rs 145, resulting in an operating profit of Rs 7,701 crore, a sequential growth of 6%. It needs to add 26.4 million subscribers in the next two quarters to meet Street expectations of 432-435 million subscribers, while the ARPU estimate is between Rs 145 and Rs 150. It had 406 million subscribers in Q2.The sequential improvement in the retail business — RIL is India’s biggest offline retailer — is gradually gaining traction online, evident from the pace of increase in the number of downloads of its app. Retail revenue climbed 24% sequentially to 39,199 crore, with a margin of 5.13% in Q2,up 170 bps.Refinery GRM and ProfitsRefining, which contributes 38% to the total revenue, was under pressure due to lower demand for petroleum products in a largely locked down industrial world. The Singapore region refining margin averaged $0.05 per barrel in the September quar ter. Because of the full ramp-up of the pet-coke gasification plant and higher complexity of its refinery that allows switching product slate effectively, RIL has been able to maintain a premium of $5.6 per barrel over the regional benchmark. RIL’s gross refinery margin (GRM) stood at $5.7 per barrel in September, compared with $7.2 in the previous quarter.Lower throughput of refinery and flat gross refining margin resulted in the refinery division’s operating profit dropping to Rs 2,000 crore, a multi-quarter low. Petrochemicals did better, with prices firming up due to higher demand from e-commerce companies. Operating profit of the petrochemical segment rose 44% sequentially to Rs 4,895 crore, while the volume increased 9% QoQ to 9.7 MT. Operating profit margins of petrochemicals improved to 16.5% — highest in four quarters.The stock is trading at 24.5 times its one-year forward earnings, a premium of 84% over the long-term average.Every $1/barrel increase in GRM and $25 per ton rise in petrochemicals Ebitda margins could potentially increase EPS by 5%.There are few select companies in the Nifty 50 where FY21 EPS is slightly higher than the previous year, according to Bloomberg consensus.