Why Did RIL Shares Fall Despite Posting Biggest Ever Quarterly Profit?

On Friday, Reliance Industries Limited (RIL) posted its highest-ever quarterly consolidated net profit at Rs 11,640 crore for the December-ended quarter. The figure was 13.2 percent higher against its profit a year ago.

While most brokerages have maintained their positive stance on the stock post the December-quarter results, a few have cut their EPS (Earnings Per Share) estimate by 4-6 percent over weakness in petro-chem business.

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Shares of RIL declined by close to 2 percent in trade on Monday to an intraday low of Rs 1,545.50 apiece. It was also among the most traded stocks on NSE for the day.

The decline could be aided by profit booking as well as mixed reviews from brokerages.

The Mukesh Ambani-led conglomerate's Q3 numbers were supported by its strong retail-based business. Higher other income and lower tax costs also helped.

Brokerages CLSA and Nomura have retained their "buy" stance on the stock with a price target of Rs 2,010 and Rs 2,020, respectively, by the end of the year, implying a potential upside over 27 percent.

CLSA said that the company has reported first positive free cash flow in over six years and its capex falls below cash PAT drove a cut in net debt. However, it cut its EPS target estimate for FY20 by 6 percent.

JP Morgan also cut its FY20-22 EPS estimates for the firm by 4-5 percent.

"We cut our FY20-21-22 Ebitda estimates by 4-2-1 per cent, factoring in weaker petchem margins although due to lower capex run-rate and strong Retail and Jio numbers retain our target price of Rs1,740," Emkay Global said.

Nomura India noted that petro-chem weakness was driven by tepid demand and new capacity additions in both aromatic and polymer chains, and firmer naphtha and ethane prices. It said that the near-term outlook appears weak for both polymer and aromatics chains.

Further, RIL said that its deal to sell 20 percent stake in its flagship chemicals and refining business to Saudi Aramco is unlikely to meet the 31 March deadline. The $15 billion deal was aimed at cutting its massive debt and secure an assured supply of crude oil to its refineries.

RIL's refining and petrochemicals businesses showed weakness in Q3. Revenue from refining and marketing was 7.2 percent lower at Rs 1,03,718 crore but segment EBIT (earnings before interest and taxes) rose by 12 percent to Rs 5,657 crore because it processed more crude oil, earning $9.2 for each barrel refined, up from $8.8 a year ago.

However, the conglomerate has strategically diversified for its next chapter of growth. Edelweiss Securities said that with a payments bank licence, 6,000 plus retail stores, 5,000 RJio touchpoints and various alliances to build technology backbone, RIL has laid the groundwork to disrupt traditional retail.

For the December-ended quarter, Reliance Jio Infocomm's net profit rose 62.5 percent to Rs 1,350 crore. Its subscriber base grew 32 percent from the previous year to 37 crore, with each user spending an average of Rs 128.4 a month during the quarter.

Credit Suisse, was the only brokerage with a 'neutral' call on the stock with a target of Rs 1,400 on RJio reporting lower than expected ARPU (average revenue per user).

Brokerages expect recently increased tariff to reflect in ARPU of the fourth quarter.