• Fri. Dec 8th, 2023

After an explosive Q1, Reliance Industries is missing the fireworks

After an explosive Q1, Reliance Industries is missing the fireworks

The stock of Reliance Industries (RIL), India’s most valuable listed company, may come under pressure after lower-than-expected results for the April-June quarter 2023-24 (FY24) (Q1, or Q1), a run-up in its share price in July and downgrades by a group of brokerages.

RIL’s global investment returns fell 5.86 percent on the London Stock Exchange on Friday. While the stock has gained 25 percent since its March low, half of that gain has come in the past three weeks.

Analysts at MK Research led by Sabri Hazarika have downgraded the stock to ‘hold’ due to the recent run-up in the stock (on the back of the Jio Financial Services demerger) and a range-bound business outlook.

Q1FY24 performance was weighed down by the oil-to-chemicals (O2C) segment and a softer near-term outlook for it.

While overall consolidated revenue fell 5 percent year-on-year (YoY), the O2C business posted a 17 percent decline in sales. The business accounted for 57 percent of consolidated revenue and 36 percent of RIL’s operating profit for the quarter.

The decline in revenue in the business was attributed to a sharp decline in crude oil prices (31 percent YoY) and lower prices of downstream chemicals. In the same quarter last year, fuel shortages were at a record high.

The company indicated slower-than-expected Chinese demand after the economy reopened, weighing on demand. Also, manufacturers and middlemen continue to destock due to recession fears and high-priced inventory, driving down prices of downstream products.

Rohit Nagaraj and Jai Bharat Trivedi, analysts at Centrum Research, expect O2C business to remain soft in the near term with normalization of fuel cracks and weak deltas due to muted global demand environment. The brokerage continues to maintain a ‘Buy’ rating.

Strong growth in consumer businesses partially offset the impact of decline in O2C business.

In the Telecommunications (Telecom) business, the company reported strong subscriber additions and improvement in average revenue per user (ARPU).

Net subscriber additions of 9.2 million for the quarter were better than brokerage estimates, and the same figure was nearly a million short. The YYY subscriber gain of 7 percent and 2 percent quarter-on-quarter was a consequence of the increased presence and widespread coverage of 4G and 5G networks, which led to higher adoption and retention.

Subscriber additions for the wireline (broadband) business were also strong and were estimated to grow 25 percent to 830,000 subscribers. Broadband subscribers grew by 50 per cent year-on-year due to new tariff plans and better product offers. On the positive side, most of the new acquisitions are in the postpaid segment, resulting in higher realisations.

ARPUs at Rs 180.5 were up 2.8 percent YoY and 1 percent sequentially. The growth was driven by an improved subscriber mix and an increase in broadband subscribers. While subscriber growth is expected to continue, tariff hikes are the main trigger for the telecom business. ARPU growth may weaken if prices are not increased in the near term.

In the retail business, there was a 19 percent growth, driven by the expansion of its store network, which was up 16 percent. Strong growth in digital commerce and new commerce, which accounted for 18 percent of sales, and consolidation of newly acquired businesses helped the top line.

The company added 555 new stores during the quarter, taking the total to 18,446, lower than the 800-plus run rate witnessed in previous quarters.

Footfall at 249 million was up 42 percent while gross floor area at 70.6 percent was up 55 percent year-on-year.

Within segments, grocery stood out with a growth rate of 55 percent. Apart from acquisitions, promotions, increase in share of general merchandise, higher sales of Jiomart and new commercial channels contributed to growth in this segment.

The company indicated that it is looking to increase its share of non-food or general merchandise sales, which will help boost operating profit.

Apart from higher efficiency and scale, the growing share of non-food business (along with fashion and lifestyle) has helped retail margins in the last few quarters.

On a sequential basis, growth was led by jewelery and AJIO (end of season) promotions, while the fashion and lifestyle segment grew at 15 per cent year-on-year.

Growth in the electronics segment, at 14 percent, was lower than overall retail growth. The growing share of grocery (especially non-food businesses) at the expense of non-core connectivity businesses led to a 3-5 percent increase in operating profit and MK Research’s retail valuation multiple.

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