Retail, e-commerce can be added levers of RIL growth in future: Probal Sen, Centrum Broking
On a year-on-year basis, we expect RIL margins to decline substantially to $8-8.2 range
Will the focus of Reliance Industries results this time be on the pressure that is seen on the core business or on the latest developments with regards to new businesses?
It is going to be a bit of both. If you look at it, downstream companies across the board are expected to show a fairly muted quarter and Reliance is not going to be immune to that. It will obviously continue to perform most of its Indian and most of Asian peers but the fact is Singapore margins being where they are, one does expect a little bit of that impact to flow through to Reliance as well. Therefore on a year-on-year basis, we expect margins to decline quite substantially to the $8-8.2 range compared to the $10 plus that they reported a year ago.
However, on a quarter-on-quarter basis, numbers are broadly flat. They will also benefit from the fact that refining throughput is expected to recover from the low of 16 million tons that they did in Q4. That is another thing that helps shore up refining margins. Petrochemical is one thing that will be an area of focus.
Very clearly, there is weakness across the board in product spreads in the petrochemical space. One does expect a fairly muted quarter as far as petrochemical profitability is concerned. Our estimates suggest anywhere between 7 and 9% quarter-on-quarter decline in EBIT from the petrochemical segment.
As far as the non-energy businesses is concerned, retail is something that should continue to do fairly strongly. I do not think that there are any worries or concerns about the growth stalling in that segment. But in Jio, while the subscriber addition at close to 26 million is still going to be healthy, ARPU will be flattish to maybe a couple of percentage points lower quarter-on-quarter.
The bigger issue is how does the InvIT actually play out and what kind of changes does one see in the profit and loss statement for the Jio business. There is quite a substantial change in terms of how the costs are going to be accounted for in Jio, given that, from the InvIT, there is a substantial charge that flows through to the P&L costs and the savings that you actually do on your depreciation and interest.
So more than the growth, the clarity on how the InvIT structure is actually playing out and how one has to really model for it for the rest of the year as the new structure plays out will be a key monitrable for this quarter.
How important is the commentary on Jio?
At the end of the day, if the subscriber addition continues to be in or about the run rate of 8-9 million subscribers, that is something that will be taken positively. Yes, there could be quarterly fluctuations where your run rate goes down, maybe by a million or so on a cumulative basis for the quarter, but really it is more the clarity on how the accounting will happen for the expenses and whether the savings in depreciation and interest can completely setoff whatever higher opex flows out because one of the key things that the management mentioned in the last analyst meet when they talked about the InvIT is that on a PBT level we will try and ensure that it actually stays PBT neutral.
If one can demonstrate that over this quarter and the next, then a lot of the focus will shift back to the core business in terms of how the subscription growth is happening and when, if at all, one sees any ARPU improvement. That will be a key monitrable.
What about retail? In terms of the kind of movement or progress Reliance has had on that front, or perhaps from the overall contribution of the new businesses, what could we expect to hear there?
In retail, frankly every quarter over the last three to four quarters have actually been surprising on the upside -- both in terms of growth numbers as well as the absolute earnings that they have been reporting from retail.
If you look at upgrades that have happened across the street in terms of the SOTP for most people, I would suspect that it has been driven by the fact that retail numbers keep getting upgraded. One obviously looks forward to the ecommerce business as and when it launches can actually add to the substantial growth of the offline model which is well ahead of peers in any case.
Our estimates suggest that from an EBITDA of around 67 billion odd in FY19, they can easily probably do about 110 billion plus in the next two-year period. If one were to look at the multiple that a retail business really gets today that business alone is now substantial contributor to the overall valuation for Reliance.
It remains one of the focus areas as far as growth is concerned and if the ecommerce business also starts really making a contribution over the next 12 months, that can be an added lever for growth.
The other aspect I wanted to mention is that the way the overall value for Reliance has played out, today the chairman has spoken about the need for EBITDA from Jio, retail and non energy businesses to be equal to the EBITDA from petrochemical and refining in the next three to five years. But if one looks at the contribution to value or valuation for Reliance, already Jio and retail at pretty reasonable valuations will be equal to that of refining and petchem and that is a very significant change that has happened over the last 12-15 months in terms of how to look at Reliance as an investment idea.
An update on asset monetisation, Jio’s progress, subscriber revenue momentum and tariffs are some of the things we will be watching out for. In terms of the numbers that you are working with, just recap for us whether it is on petchem or otherwise?
For the quarter, we are looking at about a 7% quarter in terms of refining. We expect EBIT to be flat on a quarter-on-quarter basis at about 42 billion. For petrochemical, we are looking at anywhere between 72 and 73 billion which is about 7-8% lower on a quarter-on-quarter basis.
As far as the retail business is concerned, we would expect the EBIT to be in the region of around 18-19 billion and as far as Jio and some of the other segments are concerned, those obviously see a decline of 4-5 billion because we are conservative in terms of building more opex flowing through to P&L in the first quarter while the savings in depreciation and interest might be a little bit more drawn out.
Our overall assumptions of EBITDA are at about a 193.5 billion which is a 7% quarter-on-quarter decline and our estimate of consolidated PAT are close to 93.5 billion which again is about 10% decline on a quarter-on-quarter basis.
Any impact you see of the trade wars perhaps on the petchem segment, any weakness as well on the back of some of the global cues that we have been looking at?
Yes, as I said I think Reliance can continue to outperform peers, if you look at-- if it does close to let us say $8-8.2 that suggests a $4.5-5 premium on Singapore margins which in itself is higher than most other players are achieving in this market but the fact is if your absolute numbers for Singapore remain in the $4 or $4.5 range, Reliance will also not be able to do more than let us say $9 which in itself is lower than what most street estimates are right now for FY20.
The second aspect as far as trade wars and the impact on petchem is concerned, obviously China has been the growth engine for petroleum and petrochemical products for some time now and a fear that their economy may show a structural slowdown is showing up in most of the product prices today.
If that happens, then once again while Reliance might have the more superior margins of most Asian peers, but its absolute numbers may not actually show significant growth from the levels of what they already showed in FY19 where they had a record EBITDA and EBIT from this segment.
In the near term, downstream earnings for Reliance may not show any year-on-year growth in the current weak environment and that is something that we have to keep on monitoring as and when this whole trade war and Chinese demand scenario plays out.