Why RIL shares dropped despite 22% rise in Q4 profit?

Shares of Mukesh Ambani-led Reliance Industries (RIL) slipped over 3% in opening deals on Monday, in line with the benchmark index, after the country’s most valued firm’s March quarter earnings failed to meet street estimates. The oil-to-telecom conglomerate’s consolidated net profit rose 22% in Q4 FY22, albeit it was lower than market estimates of 30-35%.

Reacting to Q4 earnings, RIL share price opened lower at ₹2,575 on the BSE, against the previous closing price of ₹2,621.15, extending the loss for the sixth straight session. In the first hour of trade so far, the index heavyweight declined as much as 3.02% to touch a low of ₹2,542.1. In comparison, the BSE Sensex nosedived 592 points to 54,242 levels.

With a market capitalisation of ₹17.29 lakh crore, the stock traded 11% lower than its 52-week high of ₹2,855 touched on April 29, 2022. It had hit a 52-week low of ₹1,906.50 on May 14, 2021.

RIL shares traded lower than 5-day and 20-day moving averages, but higher than 50-day, 100-day, and 200-day averages. The large cap stock has fallen 8% in a week and 2.5% over a month. However, the share has delivered 8% returns to its shareholder on a year-to-date (YTD) basis and 32% in the past one year.

Q4 rises 22% on digital services, retail boost

For the January-March quarter of 2022, Reliance reported a 22.5% year-on-year growth in its consolidated net profit to ₹16,203 crore on the back of strong performance by digital services and retail segments, which was below brokerage estimates of ₹17,167 crore. The consolidated revenue from operations jumped 36.8% YoY to ₹2.1 lakh crore in Q4 FY22, which was in line with analysts’ expectation. During the quarter under review, RIL's EBITDA jumped 27.7% to ₹33,968 crore as compared to the corresponding period of the previous year, helped by strong operating performance in retail and digital services business.

For the full financial year 2021-22, net profit rose 26.2% YoY to ₹67,845 crore, while gross revenue for the year stood at ₹792,756 crore, up 47% on a yearly basis. EBITDA for the year grew 28.8% YoY to ₹125,687 crore for the fiscal ended March 31, 2022.

The board of the Mumbai-headquartered company also recommended a dividend of ₹8 per equity share of ₹10 each for the financial year ended March 31, 2022.

Analysts view on Q4 results

Domestic brokerage firm ICICI Securities says RIL delivered robust performance across segments during March quarter of 2022. “The over-the-counter (OTC) segment continued the steady recovery seen over the past few quarters, with stronger refining metrics and higher sales volumes offsetting the softer margin environment in the petchem segment (OTC segment EBITDA was up 25% YoY). Upstream has shown moderate trends QoQ, with removal of the shale segment resulting in a 23% QoQ EBITDA decline even as the domestic business remained strong,” the brokerage says in a report.

As per the report, RIL’s retail business was a disappointing QoQ, with higher base and seasonal trends leading to a 3% QoQ dip in EBITDA. However, the agency remained confident about earnings growth prospects, but it remained skeptical of meaningful expansion in return ratios and/or any major moves to return cash to shareholders in view of the ‘New Energy’ investment plans.

The agency has raised its FY23E/FY24E GRM estimates for RIL by around $1 per bbl for each year, given the continued strength in product spreads seen in Apr’22 and forecasts on the same. “This is offset by minor downgrades to retail segment estimates, driving an EBITDA upgrade of nearly 1.8%. EPS however sees a downward revision of 2.2-2.9% due to substantially higher capex than earlier estimated, hence higher depreciation/interest costs,” it says.

The brokerage has reiterated an “ADD” rating, with a target price of ₹2,865 per share versus ₹2,960 estimated earlier.

Analysts at YES Securities have also recommended “ADD”, with a revised target price of ₹2,840 apiece, on sum-of-the-parts valuation (SOTP) SOTP basis, against current market price of ₹2,620, a potential upside of 8.5%.

As per YES Securities, RIL’s operating profits were broadly in‐line with street estimates. The strong YoY growth was primarily aided by exceptionally strong refining margins, stemming from sudden expansion in (high-speed diesel) HSD crack spread as a fall out of Russia‐Ukraine conflict. However, the same was offset partially by weaker petrochemical cracks.

Going forward, the agency expects the refining environment continues to be strong on the apprehension of supply disruption in refined products from Russia and China, while the petrochemical environment appears weak primarily on tepid Chinese demand and firmer naphtha. Additionally, it believes telecom ARPUs could improve further in FY23, but retail business could be impacted by the current inflationary environment.