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RIL legacy business to drive earnings in 2022, led by higher refining margins

Optimism for the energy business is reflected in the 19-percent-plus increase in Reliance Industry's stock price through the past one month

Mumbai / April 07, 2022 / 02:33 PM IST

While the March quarter earnings of Reliance Industries may make for sombre reading, given the expectations of single-digit sequential growth in operating profits and net profits at the consolidated level, analysts expect the energy business to be a major driver of earnings upgrade in the stock going ahead.

The company may not fully benefit from the sharp shift in dynamics in the global energy market in the past six weeks following Russia’s invasion of Ukraine in the March quarter, but analysts expect the benefits to reflect in the earnings of the oil-to-chemical business in the coming quarters.

Global energy markets have seen a rapid shift in the past few weeks as sanctions imposed on Russia by the western economies have resulted in a sharp squeeze on supply across markets, while demand remained robust.

Margins of diesel fuel and jet fuel have seen a sharp spike in the Western markets, while in Asian markets, they have seen a significant increase because of supply chain disruptions caused by the sanctions on Russia.

“Asian jet fuel and kerosene traders maintained a constructive view of the market for the week ahead, with sources saying that consistently lean supply amid improving demand has strengthened the sentiment for the product,” market researcher S&P Global Platts said in a recent note.

Surging margins for diesel fuel and jet fuel across the world is seen as positive for Reliance Industries given that its refineries are largely geared towards these two fuels, analysts said. In the December quarter, Morgan Stanley said RIL’s refining margins stood at $9.5 per barrel, which is expected to rise to $10.5 in the March quarter.

“We still see potential for around 10-percent-plus EPS (earnings per share) raise on stronger conviction in energy markets,” Morgan Stanley India said in a note on April 6.

The brokerage firm believes inflection in refinery margins, significant normalisation in chemical portfolio profitability towards above mid-cycle levels, and doubling of gas prices are all clearly multi-year shifts that are not yet factored in base case estimates for the stock by investors.

As per a recent note by brokerage firm CLSA, Singapore gross refining margins, a key benchmark to appraise the performance of Indian refiners, have risen $2.4 per barrel month-on-month to $9.7 per barrel in March, reflecting the impact of declining global middle distillate inventory and firm demand.

Positions in the futures market suggest that higher gasoline, diesel, and jet fuel spreads could drive a further uptick to $12-13 per barrel in Asian gross refining margins over the next 12 months to double digits, CLSA said.

Such a sharp uptick in refining margins bodes well for RIL’s own oil-to-chemical business, which still accounts for more than 60 percent of the company’s revenues and a major share of its consolidated operating profit.

“Most of 2022, we believe will shift the spotlight back on the energy vertical with investor perception reversing as refining, chemicals and upstream gas lead the way for earnings and NAV upgrades,” Morgan Stanley said.

The optimism for the energy business is likely reflected in the more than 19 percent jump in RIL’s stock price after hitting a low of Rs 2,180 in the first week of March.

Digital, retail to take a backseat

 Analysts are of the view that the hawk-eye attention of investors on RIL’s new-age digital and retail business over the past few years could moderate given expectations that the earnings stream of both segments may remain stable going forward.

The outlook for the consumer retail business could be muddled by the high inflation dynamics that could deter consumers from spending on discretionary items while also preferring cheaper alternatives in daily necessities.

While sales momentum in the retail business, both offline and online, is seen rising due to the reopening of the economy in the March quarter and new store additions, analysts see operating performance to be muted.

“Despite strong revenue growth, we expect flattish EBITDA margin of 6.6 percent in retail on back of high competition and inflation led pressures,” BofA Securities said in a note.

Jefferies India said that the impact of inflation on consumer wallets can potentially moderate the pace of recovery in the retail business, which has led the brokerage to cut its operating profit estimate for the vertical by 5-11 percent for the next two financial years.

On the digital and telecom side, the recent move of the company to rid itself of dormant users on its network and higher operating costs due to increase in fuel costs to run telecom towers could weigh on earnings expectations in the near term.

That said, BofA Securities does not expect a major decline in subscribers in 2022-23, while there is an expectation of the recent tariff hikes to fully reflect in average revenue per user going ahead.

Overall, BofA Securities expects RIL to report a 14.2 percent sequential rise in consolidated revenues to Rs 2.1 lakh crore for the March quarter, while the company’s net profit is seen rising merely 5 percent on quarter to Rs 19,500 crore.

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Chiranjivi Chakraborty
first published: Apr 7, 2022 02:33 pm