Reliance Industries share analysis after Q2 Earnings

Oil Refinery

Nifty Companies now have started reporting their earnings for Quarter ended on September 2018. Infosys and TCS both have matched the experts estimates on the back of Falling rupee and Improved Revenue from Digital Business Operations. However on 17 October, one of the biggest conglomerates, Reliance Industries also released its earnings report with some new aquisitions and Investment plans.

For the Q2, Reliance reported a stable profit figure which remain almost unchanged as compare to previous Quarter. But on Revenue front, the company has continued to report growth of more than 10 percent QoQ. Revenue in the September quarter rose nearly 55% to Rs 1.56 lakh crore compared to Rs 1.01 lakh crore a year ago.

In both Retail and Digital Services Business, the company has reported a mutifold growth in its Operating Profit. Whereas Retail Business generated almost Rs 32,400 crore revenue in the September Quarter, Digital Services contributed almost Rs 10,900 crore revenue to total revenue of Reliance Industries.

Operating leveraged aided a margin expansion of 155 basis points YoY to 3.8 percent in Reliance Retail Business.

For Refining business, company again continued to report stable performance. Revenue in September quarter rose nearly 3.5 percent to 98,700 crore. However, Operating Profit remain same to Rs 6,300 crore.

Petrochemical business or Cash Cow business for Reliance continued to perform better Quarter on Quarter. Revenue and Profit in September quarter rose nearly 9 percent and 3 percent. However on year on year basis, Revenue rose almost 56 percent to Rs 43,745 crore and operating profit rose 64 percent to Rs 8,120 crore. The 56 topline Growth was driven by a mix of higher prices and higher volumes.

 

Q2FY19 Performance Highlights

  • GRM stood at $9.5 per bbl for September Quarter.
  • Total Revenue increased by 53.6 percent year-on-year and 9.7 percent QoQ.
  • Around 138 new stores and 535 Jio Points were added during the Quarter.
  • Jio’s net revenue rose 13.9 percent QoQ to Rs 9240 crore.
  • Jio’s ARPU stood at Rs 131.7 per month, a marginal dip of 2.1 percent as compare to previous Quarter of Rs 134.5 .
  • Oil and Gas Business saw a decline of 12 percent in revenue.

 

Analysis

Petrochemical Business of Reliance Industries is still the biggest component of its overall Cash Flow level. Only through this, it has become possible for the Conglomerate to handle such a high pile of Debt i.e 2.5 lakh crore.

Refining Business is also generating significant Cash for the company. But with the passage of time, the growth in Revenues of Refining business has not lead to same growth in the Operating profit numbers also.

Margins in Petrochemical business have remained stable and will probably continue to remain stable or would improved with the investments recently made by the company.

Reliance Retail plus Jio plus Petrochemical ≈Rich Value

Retail and Jio Businesses continued to be the focus of the company after having an unstable performance from Refining Business over the past few quarters. Both Retail and Jio businesses have now reached the combined revenue figure of more than Rs 40k crore and profit number of nearly Rs 2k crore.

Petrochemical business is also generating almost Rs 44k revenue and Rs 8k crore profit quarterly at operating level. So, if we combined all these three business i.e Petrolchemcial, retail and Jio, then Reliance would still has Rs 80k + revenue and Rs 10k operating profit.

The interesting point need to be noted here is that these three business vertices alone have combined value of more than Rs 6 lakh crore plus, if we calculate it on the basis of valuations of its peers in the stock market. It all means that Refining Business is just left now to support the overall performance and volatility level of the businesses of various segments. Why?

It is because 70 percent of the Operating profit of Reliance Industries is now earned from Non-Refining Businesses and more than 20 percent of revenue is now coming from Consumer focused businesses. Reliance also know this, that’s why they are just focusing on Retail and Telecom Business.

Petrochemical Business≈Supporter of all expenditures

In Petrochemical Business also, it is now act as just to support the overall expenditure of Various Activities. There is no doubt that Petrochemical business will still continue to rise with the recent investment made in this Business. But in future, no one knows exactly for how much time Petrochemical business would remain sustainable. Atleast, next 3-4years are safe for this business, but after it…..difficult to say. That is the one reason for why Mukesh Ambani is spending more on Retail and Telecom. Future of Telecom and retail businessss looks much safer for Reliance Industries as compare to other ones. Because Consumers will continue to buy products for years and years either from online stores or retail stores. And without telecom services, no one can connect with each other. Thus, telecom companies have a long lasting future. Also, these two have multiple opportunities.

But to fuel the Growth of its Telecom and various other Businesses, the company is now sitting on a debt of Rs 2.5 lakh crore. Sometimes, this figure of debt may scare you when you know that the Petrochemical business is the only one which is balancing this Debt amount with Reliance Industries.

I don’t think that without Petrochemical business, Reliance Industries is enough capable to regularly pays the interest cost on this loans and simultaneously, also keep the heavy growth expenditure plans in active positions.

Reliance shares still trades at attractive valuations?

This could also be the reason for why Reliance Industries is still trading at attractive valuations. Except of Refining and Oil and Gas Business, all the other businesses and activities of Reliance Industries looks great and quite attractive. But if you currently buy a share of Reliance Industries, you will also get the Refining and Oil and Gas Business, for which the demand from different types of investors is comparatively low.

Thus, it could be the reason for why Institutional Investors are still not buying Reliance shares in that amount, in which they would buys shares of Bajaj Finance, ITC, HUL, TCS, Infosys etc.

Overall, from above paragraphs, I just wanted to tell you that Reliance Industries is still a great choice from largecaps in terms of potential wise. But still, Investors are not very convincing about its story because of some risks associated with it.

Investment in Den, Hathway by Reliance Industries

Recently, Reliance Industries has also announced to buy majority stakes in Den Networks, Hathway Cable and GTPL Hathway. Company will acquire these stakes through Preferential share allotment and some stake buy through promoters. In a combined value, Reliance will invest around Rs 5,200 crore in these acquisitions.

From few weeks, this news has already boosted the share prices of these three stocks resulting in more than 50 percent surge in these shares despite of weak market. As always happens, shares or companies where Reliance Buys a majority or controlling stake generally found to have already completed their 70-90 rally before such announcements made in the public. After announcement and post further rally of hardly 15-20 percent, such stocks takes a U-Turn. After some consolidation at higher levels, acquired companies shares then starts sliding day by day and finally on some day, you finds that these stocks have reached that levels from where they have started their rally.

So, be carefull in to make any fresh positions in Den and hathway shares after recent development.

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