Mukesh Ambani’s Reliance Industries Slides 30% From Record High

Shares of billionaire Mukesh Ambani-controlled Reliance Industries Ltd. also marked their worst start to the year since 2008. The oil-to-telecom conglomerate’s stock has declined more than 26.4 percent year-to-date—the worst drop in 12 years. While the recent market turmoil because of coronavirus outbreak and crude plunge contributed, the stock had fallen about 16 percent prior to that.

Energy Weakness

RIL’s petrochemical and refining businesses—which contribute more than three-fifth to its operating profit—face uncertainty in demand as the market has seen a supply gut when the company completed its capacity addition.

In petrochemical business, prices of five of its key products fell 8-16 percent in the last six months. The would result in weaker margins for some of its products used in making fibre, plastic and chemicals—polypropylene, polyethylene terephthalate, purified terephthalic acid and paraxylene. That’s expected to weigh on the segment’s revenue and Ebitda.

Weak prices reflected in the quarter ended December as the company reported its biggest drop in operating profit from the petrochemical segment in at least 17 quarters.

Refining business margin, too, hasn’t fully recovered. While the Singapore gross refining margin—the Asian benchmark and a measure of how much a refiner makes by turning a barrel of crude into finished products—did recover a bit from decadal lows, it is still lower compared to previous highs. Singapore GRM stood at $2 a barrel mark in March — even though the market expected it to rise after the implementation of stricter fuel emission standards for merchant ships.

Telecom

Reliance Jio Infocomm Ltd.—the company’s telecom arm and India largest wireless operator by revenue—was one of the triggers for the surge in the parent’s share price. But after the tariff hikes in October and December, the company added fewer subscribers in the third quarter.

Moreover, despite tariff hikes, Reliance Jio’s average user revenue rose just 0.7 percent sequentially. Net subscriber additions in December fell to 82,308 compared with an average of 95 lakh user a month earlier.

Debt Or No Debt?

RIL has a net debt of more than Rs 1.53 lakh crore. Nearly six months after Chairman Mukesh Ambani laid out a road map to make the company net debt free by FY21, there are signs that could be delayed.

Ambani plans to sell 20 percent stake in the refining and petrochemical business to Saudi giant Aramco, bring in strategic and financial investor in retail and telecom business and evaluate value-unlocking options for real estate and financial investments. In August, RIL said BP will pay about Rs 7,000 crore for acquiring a 49 percent stake in its existing petrol pumps and aviation turbine fuel network.

RIL’s debt reduction is contingent on asset sale, Avadhoot Sabnis of CGS-CIMB Securities International Pte. Ltd., said in a note. RIL will need to execute the planned 20 percent stake sale in oil-to-chemicals business to Aramco as well as a sale of shares in telecom or retail businesses to address the large debt issue, he wrote.

The sale to Aramco is, however, facing hurdles. Bloomberg reported that the government has petitioned a court to halt the proposed transaction.

Unfriendly Tax Proposals

RIL, the country’s largest producer of a chemical that’s used to make polyester yarn, will face more competition in the segment after a proposed cut in import duties for purified terephthalic acid. The finance minister in the budget said the government is getting rid of the duty to help ensure the easy availability of the commodity at competitive prices.

Morgan Stanley, in a note, said the removal of anti-dumping duty on PTA could affect RIL’s earnings by 3 percent.

The government has also proposed a change to dividend distribution tax, a step that could slow efforts of companies to raise funds through selling units in investment trusts. The change in rules will curtail returns for investors as they will have to bear the tax on dividends. That comes when RIL was trying to raise funds and pare debt by selling a stake in trusts holding its telecom towers and optical fibre network.

Analyst View

Yet, nearly 84 percent of the 37 analysts tracking the stock have a ‘Buy’ rating. This is the most since August 2016, according to Bloomberg data. After the recent correction, the share price of RIL has fallen nearly 46 percent below the consensus target.

Analyst remain bullish citing plans to pare debt and improvement in consumer businesses.

Nomura

• Positive on strong earnings outlook, slowing capex intensity and efforts to reduce debt.
• Sharp telecom tariff increase further improves outlook.

Axis Capital

• Consumer businesses continue to sustain momentum with positive surprise on revenue.
• Retail slowly entering into steady state in FY21.