What are your observations on Reliance’s retail and O2C business performance?
O2C segment’s EBITDA seems to be on the recovery path. Volumes and margins would have been higher in this quarter if you look at global margins for both refining and petrochemical segments. For petrochemicals, it has been fairly robust in the last few months. It is expected to continue in the coming few months as well. So that should hold up well despite may be some challenges which we may see in the domestic markets from the second wave.
The retail business is pretty much back at full throttle. Reliance Retail reported its highest ever revenues and EBITDA which is well above pre-Covid levels now. There are near term challenges but had the situation been a normal one, the company would have been back to its way of delivering stronger numbers from the retail business. The digital new commerce is also somewhat encouraging as it is contributing around 10 per cent of their revenues versus negligible 1-2 year ago.
Jio’s subscriber additions have been a disappointment over the last few quarters. It seems like they picked up well in February and March at a run rate of 6 to 7 million, which is back to their pre-COVID levels. Their new offer on Jio Phone seems to be getting some traction and leading to subscriber additions. The ARPU, however, was a bit of a letdown.
Given the kind of underperformance that we have seen in the stock of Reliance Industries since October 2020, what are you pencilling in now?
Our fair value for Reliance stands at Rs 2,050. For it to change meaningfully or for the stock to rerate, two factors are important. The first one is that the outlook on the downstream energy business or consumer facing business (retail and telecom) has to change. A major earnings upgrade cycle seems unlikely at least for the next 6-9 months because we are already baking in some recovery. It is unlikely that they may surprise positively on that.
Secondly, if some of their new initiatives like JioMart, fibre-to-home services start scaling up well it could lead to a further upside in the stock. But the progress has so far been somewhat sketchy. The disclosures have also been limited. If there is some improvement in disclosures about these segments, it could help build some some confidence on market numbers.
