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.