Reliance Industries Q4 driven by strong petchem, digital and retail; cashflow set to hit sweet spot

Reliance Industries (RIL) reported an operationally healthy Q4FY18 across most verticals, even if gross refining margins (GRM) were slightly below expectations. The strong overall performance was largely driven by traction in the petrochemicals, digital, and retail segments. While we expected a healthy performance from petrochemicals (petchem) and digital segments, what came as a surprise was the phenomenal topline and profit growth from retail. Jio continued to post a good set of numbers and posted a positive EBITDA and profit after tax in the quarter ended March.

Overall revenue grew almost 30 percent year-on-year (YoY )along with a 51 percent YoY uptick in earnings before interest tax depreciation and amortisation (EBITDA) and a 1700 basis points (bps) margin expansion. Net profit growth was a tad slow at 17 percent mostly due to higher interest and depreciation costs with most major projects coming on stream.

Segment wise performance –

Petrochemicals – volumes and price drive growth

In line with expectations, the petrochemical segment reported a robust performance, helping drive overall profitability. A strong 13-percent topline growth in the petrochemical business was driven by a mix of higher prices for products along with higher volumes especially in paraxylene and ROGC (refinery of gas cracker).  EBIT growth of 12 percent was driven by strong margins from polypropylene, PVC (polyvinyl chloride) and downstream polyester products.

While the fiscal had started on a slow note, Q2FY18 saw strong traction driven by high growth in the polymer and polyester demand which helped the company touch its highest-ever production levels. With all major projects now fully commissioned, the upcoming year is expected to witness strong growth with high volumes and management has guided to stability in margins.

Though substantially outperforming the benchmark Singapore GRM of USD 7 per billion barrel (bbl), the GRM at USD 11 per bbl remained slightly below expectation. Higher crude prices facilitated the 30 percent increase in the top line, however, the adverse move in Brent-Dubai differentials and reduced crude throughput led to a decline in the segment EBIT. Volumes grew almost 42 percent in the 1,313 fuel outlets across the country.

Oil demand grew on the back of global demand upswing led largely by the aviation, gasoline and diesel verticals. Domestic demand remained close to 1.6 million barrels (mbl) per day during FY18, much above the expected levels of 1.3 mbl. In FY19, demand is expected to stay steady around 1.5 mbl, which would facilitate growth in the segment and improve margins.

Organized retail – a positive surprise

The results from the organized retail segment came as a positive surprise with a phenomenal 134 percent topline growth during the quarter along with almost a 300 percent growth in EBIT led by expanding scale, and operational efficiencies. Volumes grew across consumer baskets and traction in this segment marks the overall expanding presence of the company’s consumer portfolio. RIL plans to further expand its consumer retail presence in every format which would further drive profitability in the coming years. Strong traction in this high-margin business will be worth watching out for.

Upstream Oil segment – less erosion with high crude prices

Upstream performance remained near flattish with an overall decline in production. The crude oil price continued its upward trend in 4QFY18, up 24 percent YoY, which helped to make up for a portion of the loss. Ramping up of the CBM operation and the commencement of the upstream gas production would be some key developments in the future.

Jio – keeping strong

Jio reported revenue from operations of Rs 7,128 crores (up 3.6 percent quarter on quarter) and added 26.5 million net subscribers over the last quarter, bringing the subscriber base to 186.6 million at the end of March 2017.

The company continued to follow its strategy of capturing subscriber base aggressively even if it meant lower ARPU (average revenue per user). The strategy resulted in a strong sequential growth of 16.6 percent in its net subscriber base whereas its ARPU declined by 11 percent and stood at Rs 137.1 per month, still much better than what Bharti Airtel, the market leader, reported (Rs 116).

In terms of operating margin, Jio reported a minor contraction of 40bps in its EBITDA margin, which came at 37.8 percent, respectable nevertheless. The contraction was primarily due to the reduction in tariff to maintain the price difference with the incumbents. This got partially offset by the reduction in access charges (net), which fell from 15.7 percent of revenues from operations to 15.0 percent in this quarter (Telecom Regulatory Authority of India (TRAI) reduced interconnection usage charge (IUC) by 57 percent effective 1 October 2017).

What next?

After the end of an aggressive capex cycle, RIL now stands at a sweet spot where most of its projects have started delivering. The company is likely to see a big cash flow boost in upcoming years along with enhanced operating efficiencies and an uptick in the return ratios. The overall macro environment also stands quite conducive to the various verticals where the company has exposure.

With the full commissioning of the refinery off cracker plant, we expect great vertical integration and higher margins for the petrochemical business which is already posting good growth.

We believe Jio would continue its stellar run, going forward, on the back of significant capacity, latest 4G technology and huge unmet potential available in India.