RIL's best yet to come, say brokerages

New Delhi: Reliance Industries' petrochemical division has overtaken oil refining to become the largest earnings contributor segment for the company, brokerage firms said applauding the firm's robust earnings in FY18, saying the best is yet to come.

In comments on RIL's January-March and 2017-18 fiscal year earning statement, HSBC said strong petchem performance was offset by telecom arm Jio earning lower-than-expected average revenue per user.

RIL's Q4 earnings were driven by strong petchem performance that came from higher volumes from new paraxylene, refinery offshore caracker (ROGC) and downstream units, and higher margins from polypropylene, polyester and fiber intermediate products.

Jio subscriber net additions remain strong at 26.5 million during the quarter but results a miss due to lower-than-expected average revenue per user at Rs 137, it said adding refining margins dipped to USD 11 per barrel due to lower throughput and adverse Brent-Dubai differential.

Goldman Sachs said, "The key driver of growth was the petrochemical division, which grew 10 percent quarter-on-quarter, and is now the largest segment earnings contributor, overtaking refining."

Refining margins missing forecasts were offset by strong growth momentum from the retail business. Revenues from Jio were in-line with estimates with higher subscribers offsetting lower average revenue per user (ARPU), it said.

"With the shares continuing to do well investors may wonder whether earnings momentum has already played out and shares are fully valued. However, we believe the best is yet to come," it said.

Goldman said it expects pre-tax profit or EBITDA to further grow by 35 percent in the year to March 31, 2019 after growth of 40 percent in 2017-18 fical. Growth will largely be driven by the petchem business reaching full earnings power in the coming quarter while growth momentum from Jio and retail will continue, it said.

With earnings power of new projects evident during FY19, RIL is expected to generate USD 6 billion in free cash flow as capex in both the core business and the wireless business is largely done.

"We expect management to use free cash flow to pare down leverage, which has increased versus history," it said.

Citi said RIL's 3 of the 4 downstream expansions have now fully stabilised and ramped up. "Phase 1 of petcoke gasification is currently under stabilisation, while phase 2 of the gasifiers is under commissioning," it said adding as Jio's first stage of 4G coverage nears completion, the focus has shifted to Fiber to the home (FTTH) and enterprise (commercial launch shortly, but will be gradual.

Morgan Stanley said with new projects all underway, earnings have begun to fire on most cylinders with a downstream upcycle and crude price tailwinds. "RIL's energy earnings remain amongst the most stable of global peers and continue to anchor growth, while retail/telecom rapidly raise domestic leadership."

While Q4 petrochemical segment earnings reflected the impact of full downstream chemical integration, rising polyester spreads and cheap ethane feedstock, oil refining was good but can be better, it said.

On telecom earnings, it said RIL has cited traction of higher-priced plans with lower-end subscribers (Jiophone), as data usage remains largely at par with other users.

"Is there an end to investments? This has been a key investor question, and we see some anecdotal evidence of capex intensity falling: 1) energy capex appears largely behind as petcoke gasifiers have started operations; and 2) telecom capex (60 percent of total in F18) on mobility is mostly done, with a focus on rolling broadband/wireline services starting this quarter," it added.

BofAML said Q4 petchem EBITDA of Rs 7,700 crore exceeded that of refining (Rs 6400 crore).

It said at the analyst meet, Reliance reiterated that Jio is a digital services business (not just telecom), for which they need to acquire customers and that Jio cannot be short ? term focused (having invested USD 35 billion). Jio are likely to launch their Fiber to Home services over the coming weeks (in phases).

Kotak Securities said expected growth trajectory to slow down until Jio picks up, given near full utilization of petchem projects, limited upside to downstream margins and likely subdued contribution from gasifiers.

CLSA said while Jio's revenue missed forecast by 1-2 percent as higher subscribers were offset by lower average per user revenue, it was another stellar quarter for retail with revenue more than doubling, pre-tax profit nearly tripling.

Deutsche Bank said over the next six months, the commissioning of projects in its energy business and ramp-up of monetisation at Jio should maintain the outperformance. The contribution from expansions and robust downstream margins should drive RIL's EBITDA growth of 24 percent CAGR over FY18-20.

Nomura said as FY19 will see full benefits of several key projects like ROGC (refinery off-gas cracker) and downstream, PX, ethane imports etc, the profitability should further improve.

The much awaited Petcoke gasification is also nearing commercial start. As per management, the phase-1 of four gasifiers in domestic tariff area (DTA) refinery are under-stabilization / optimisation, and commercial production is likely to start soon. The phase-2 of six gasifiers in special economic zone (SEZ) refinery are also mechanically complete, and should commission over next 6 months.

UBS said although the petchem, retail and Jio performance was slightly better than expected, investors may question continuation of USD 3.2 billion in quarterly capital expenditure and increase in net debt which could lead to weakness in the share price.

BNP said RIL was very firm about the strategy going forward on Jio, which continues to be focused on customer acquisition and is open to further tariff cuts based on the actions of the incumbents. However, pricing does remain an important determinant for the long term success of the business.