Beneath RIL’s Steady Growth In Earnings Were Also Some Hiccups

Reliance Industries Ltd’s (RIL’s) June quarter results weren’t exactly comparable with earlier quarters because of the divestiture of its tower and fibre units as separate units housed under an infrastructure investment trust. Besides, there has been a change in accounting norms, which impacted the results as well.

Even so, the company’s earnings before interest, taxes, depreciation and amortization stood at Rs. 21,315 crore, higher than the Street’s estimates of Rs. 20,079 crore.

As has been the case in the past many quarters, RIL’s consumer businesses drove profits, with their share of operating profit increasing further to 29% in Q1. In the March quarter, the telecom and retail businesses accounted for 27% of its consolidated earnings before interest and tax.

While overall profit growth was decent, performance of some of the key businesses displayed some hiccups. In the telecom business, for instance, average revenue per user fell to Rs. 122 in Q1, from Rs. 126.2 in the March quarter.

So, even though the company’s subscriber base grew by 8% sequentially, revenue rose at a lower rate of 5.2%. In the March quarter, Reliance Jio Infocomm Ltd’s revenue had risen 7% sequentially.

From the looks of it, Reliance Jio is likely to drive volumes at the expense of realizations. As such, analysts hoping for a recovery in tariffs might end up being disappointed.

In the refining business, RIL reported a gross refining margin of $8.1 per barrel, down from the $8.2 per barrel margin it had reported in the March quarter. This was despite a slight increase in Singapore refining margins last quarter and, to that extent, is a slightly negative surprise in the results. Profit of the petrochemicals division fell about 6% quarter-on-quarter, with margins of some key petchem products declining.

Finally, in the retail business, the star performer in the last fiscal year, the high base seems to have finally caught up. Profit of the division rose only 3%, sequentially, in the June quarter. While it’s heartening that the consumption slowdown hasn’t dragged down profits of the division, the fact that growth is subdued doesn’t augur well for overall profit growth.

Beyond the quarterly results, investors need to focus on the company’s high indebtedness, apart from the possibility of free cash flow missing the Street’s optimistic estimates. “Street EPS estimates still appear too optimistic as do free cash flow estimates. Debt in telecom is still rising, as well as in retail where it is now around Rs. 16,500 crore,” analysts at Jefferies India Pvt. Ltd said in a note to clients. EPS is earnings per share.

Of course, the hive-off of the tower and fibre business has helped reduce debt, especially now with the tower unit receiving an investment worth ₹25,215 crore from Brookfield Infrastructure Partners Lp. But there is a commensurate impact on the telecom business’s profits as tower rentals are now a cost item. It remains to be seen what the net gains from the transaction are.

For now, investors may well be pleased that despite the global and domestic slowdown, RIL’s reported profits remain steady.―Livemint