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  • Reliance Industries Q2 results: Cash burn, rising debt take sheen off sure-footed showing

    Publish Date: October 19, 2018

    Recommendation: Sell

    Target price: Rs 1,070

    From a distant at least, it seems that Reliance Industries has gone through the gears with minimum effort during the July to September period.

    Why? For starters, the well-oiled corporate behemoth’s second quarter results were broadly in line with market expectations: its net profit surged due to a decline in tax rates, the petrochemical and retail businesses remained on form, while its telecom arm — Jio — laid a platform for future growth.

    The one spoke in the wheel, though, was its mainstay refinery business. Fortunately though, the company’s petrochemical business made sure it covered up for the refining segment.

    Even though the company’s headline numbers seem fine, a closer look suggests that the company’s capital expenditure, or capex — money spent to acquire other businesses or maintain/upgrade their assets — and debt levels have inched higher, which has added a dose of intrigue among market-watchers.

    That’s because high capex and high debt levels can restrict the company free cash flow in the near future. Free cash flow is money that can be used by companies to repay debt, expand businesses and pay its shareholders.

    Now that we have drawn the broad contours, let’s scan the company’s businesses with greater scrutiny.

    Refining the glitches

    Let’s start with the refining business. The numbers were disappointing this time around. More so because global crude oil prices were operating at high levels — it was often hovering above the $80 per barrel mark.

    Breakdown of an important petroleum refinery in Jamnagar (Gujarat) has been cited as a key reason for the relatively poor show this quarter. The refinery, according to Bloomberg Quint, had the capacity to process 5 lakh barrels of crude oil per day. But the refining unit remained shut for close two months, thereby hurting the total output of the business.

    In a positive, even though refining margins were below expectations at $9.5 per barrel, the business’s earnings before interest and tax (EBIT) were more or less the same when compared to the first quarter of FY2019 due to higher oil prices. That was heartening because the refining margins in the first quarter were much higher at $11 per barrel. EBIT is synonymous with operating profit.

    Related read: What is EBIT

    Petrochemicals rises to the occasion

    Petrochemicals revenues have been on the rise for the past few quarters — it increased from Rs 40,287 crore in the April to June period to Rs 43,745 crore this quarter. This was mainly down to higher output and better margins due to rupee depreciation.

    However, the purple patch may not last long. Reliance has intimated that the output may not increase any further as plants are working at full capacity.

    Retail therapy

    Until a year back, the retail and telecom contributed just 5% of Reliance Industries’ total profits. But now, the two are threatening to rattle the internal hegemony of petrochemicals and refinery — they both now account for 20% of the company’s consolidated profits, according to Mint. No wonder, all eyes are on the two shiny things.

    Let’s start with retail first. The retail business posted revenues of Rs 32,400 crore — a massive jump of 25% from the previous quarter.

    The business has grown amid Reliance Industries’ aggressive plans to increase its footprint in the retail sector. As a result, 78 stores and 535 Jio Points were launched between July 1 and September 30. Plus, retail space grew from 0.9 million square feet to 19.5 million square feet — an indicator of the company’s ambitious plans.

    Telecom titans

    Reliance Industries’ telecom arm — Jio — has been a juggernaut, adding more than 25 crore subscribers within 25 months of its existence. This quarter alone, it has added 3.7 crore subscribers. This helped Jio’s revenues increase 13.9% from the previous quarter.

    Ever since its inception, Jio has set the cat among the pigeons in the telecom sector. By introducing dearth-cheap data, Jio stung the incumbents by grabbing significant market share.

    Related read: Jio juggernaut aside, incumbents on the rope

    But amid all the hoopla, two things stand out in the second quarter of FY2019: increasing capital expenditure and declining average revenue per user (ARPU) for the fourth consecutive quarter. To provide context, Jio spent Rs 16,000 crore as capital expenditure in the second quarter alone.

    The spending isn’t going to abate any time soon. That’s because it is planning to enter the cable and broadband business with a bang. Having bought stakes in Hathway Cable and Den Networks for more than Rs 5,200 crore recently, Jio will try to repeat its mobile data stunt by introducing rock-bottom internet tariffs. In fact, the company aims to provide internet connection to 5 crore households across 1,100 cities

    Finances at a glance

    — Reliance Industries grew 14% (quarter-ver-quarter) to Rs 9,240 crore.
    — Its net income was 7% above our estimate — at Rs 8,860 crore — due to decline in tax rate from 28.4% to 24.6%.
    — Gross capital expenditure grew to Rs 39,200 crore.

    — Net debt increased to $39 billion from $36 billion two quarters back.

    Disclaimer: REDUCE rating suggests we expect the stock to deliver -5 to +5% returns over the next 12 months.

    BUY rating suggests we expect the stock to grow around 15% in the next 12 months.

    ADD rating suggests we expect the stock to deliver more than 5% returns in the next 12 months.

    Also read What is troubling India’s financial markets


    There is no room for emotion in the stock market. Staying invested is more rewarding than panicking and exiting when the chips are down. Your stock market investments should not cause a rush of adrenaline. If you stay focused and develop good financial discipline, it will not be too difficult to tide over a market crash.

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