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reliance industries: Reliance earnings momentum likely to slow down over next 2 quarters: Probal Sen

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From here, we would expect 10-15% return, but investors would probably have to be patient and ride through the near term weakness and uncertainty until this new Covid wave stabilises in the next two to three months, says Probal Sen, Senior VP-Research, Centrum Broking.

It seems that the chemicals business is going to drive earnings this time around. What are you pencilling in from Reliance?
After a long time, that O2C (Oil to chemicals) segment is expected to deliver fairly strong numbers. If we look at QoQ trends, against $76.5 billion EBIT, we expect close to $87 billion EBIT in the O2C segment.

Across the board, we have seen good price improvements in petchem across polymer and plastics and even in refining. I do not want to comment on GRMs but if you look at key product spreads, particularly gasoline and diesel, both have improved by between $1 and $2 on a QoQ basis. From that aspect, O2C and continued recovery in the retail segment should drive the numbers.

As far as Jio is concerned, it is more of a flattish trend this time around. The subscriber levels are likely to improve a little bit but you are also likely to see an ARPU adjustment because IUC has become zero. So you will have a Rs 14-15 optical reduction in ARPU even though that does not have too much impact on the EBITDA level. So overall a good quarter. On an overall basis, I would expect EBITDA to go up by about 8% QoQ which is about the 6% YoY increase to about $234 billion, while profits are likely to be sharply higher. This year, because of all the O2C bifurcation related adjustments, the actual tax burden has been fairly muted compared to last year and that is why the profit improvements are sharply higher at 40 odd percent to $148 billion, while flattish on QoQ level.

Are all these fresh restrictions across the country — the mini lockdowns, curbs and curfews — going to impact the retail business this time?
It is not going to have that much of an impact in Q4 because the restrictions had just started to take place.I believe that the impact of the new restrictions will be felt in retail perhaps over H1 depending on how the second wave goes and when the states feel comfortable enough to loosen some of the restrictions around non-essential retail supplies via ecommerce or physically. If the lockdowns extend beyond a couple of months, we are again likely to see some sort of migrant exodus and stoppage of a lot of infra and construction activity. A chunk of the labour population have Jio phone subscriptions. So, even there, we could see some sort of an impact. We are looking forward to the management commentary on how they see the next three to six months panning out for these two segments.

The Reliance stock has been a little bit muted these past few months. What is the sense that you are getting? Analysts are talking about rerating and the company being back on a strong momentum trajectory. Is that what you are pencilling in too?
More than the Q4 numbers, my sense is that the AGM that is coming up in July or August, will probably be more keenly looked forward to. In the Q4, clarity will come in terms of what the final net debt or net cash number looks like. After all the cash that came in, I would expect them to have settled whatever borrowing repayments they have to do. We will have a picture of that. It is going to be way more important than the P&L trends, at least as far as RIL is concerned.

The announcements of new initiatives and any progress on the Aramco deal are likely to come only by the time of the AGM. I have no idea how Reliance plans to communicate that but I think that will be the key trigger. Over the next three to six months, we are likely to see a slowdown in earnings momentum because I think Jio, Retail and even refining products — given the wave of new restrictions in both India and Japan which are the third and fourth largest consumers of crude products — are not likely to improve much.

The metrics in the near term once again start to look a little bit muted but from Reliance’s perspective, movement on downstream value unlocking via Aramco deal as well as any other business initiatives — whether it is a smart phone launch with Google which they have been working on or any momentum in the fibre-to-home business — as and when we see reporting come through, those are likely to be triggers along with continued improvement in the balance sheet quality.

The valuations as of now are very comfortable. From here, we would expect 10-15% return, but investors would probably have to be patient and ride through the near term weakness and uncertainty until this new Covid wave stabilises in the next two to three months

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