Analyst Corner: Reiterate ‘buy’ on Reliance Industries

BoFA Securities

We expect RIL to report net income of Rs 11,100 crore, down 2% q-o-q led by a steady momentum at telco, retail business partially offsetting petchem weakness. Reiterate ‘buy’ on a favourable risk-reward and expect the retail/telco business to surprise in the next 12 months. While we estimate Jio gross adds to be strong in Q3, we believe that Jio net adds to be 18 mn (vs 24 mn in Q2). Unlike incumbents, we don’t expect Jio’s Arpu to improve q-o-q but expect flat as higher mix of feature phone users; As most subscribers are on 84-day pack, the hike benefit will be spread next 2 quarters. Jio, however, will show a good Ebitda margin growth to 43%, up 132 bps q-o-q as IUC is pass through.

Retail: We expect strong momentum across all divisions of retail led by new store openings. We estimate retail Ebitda/Ebit to improve 58%/57% y-o-y; In post-result briefing, we expect more clarity on the recently announced Jio-Mart initiative, which allows consumers to order from Jio-Mart app and even Kiranas to order.
Refinery: We expect refinery Ebit to improve 7% q-o-q led by GRM improving to $9.9 ($9.4 in Q2). In Q3, light heavy crude spread has widened, lending some advantage to complex refiners like RIL. The Singapore complex Reuters GRM for Q3FY20 has averaged $1.85/bbl compared to $6.56/bbl in Q2. This may no longer be a relevant benchmark as more than 20% of its product slate is comprised of fuel oil.

Petchem: Petchem cracks in 3Q are expected to remain muted. The Naphtha cracker margins are down 18% and PET integrated cracks are down by 24% q-o-q. The demand for pet-chem is also likely to be tepid in Q3, which could further hurt profits. We expect RIL’s Petchem Ebit to decline 16% q-o-q. We tweak our FY20-22 EPS by 5-1% to factor weaker than expected Petchem. Our PO is down 1% to Rs 1,685.