Reliance’s rising debt is the focus

The oil-to-chemicals (O2C) segment is the main culprit here, with earnings before interest and taxes (Ebit) falling by as much as 46% respectively. The performance of this segment has been successful due to the introduction of an additional excise tax on transport fuels. Weak polymer margins are also dragging on this segment’s profitability. To that extent, RIL’s consumer, retail, and telecom businesses, which performed relatively better, make up for the weakness of O2C. Footage in the retail segment has increased by 23% compared to pre-classic levels. The average revenue per user in the telecom segment is 177.2 in Q2 vs 175.7 in Q1.

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However, that did not impress investors. Shares of RIL fell 1.5% on Tuesday to 2,441.55. Rising debt and capital (investment) spending are areas of concern. RIL’s reported consolidated net debt on September 30 was Rs 93,253 crore, up from crore 57,655 on June 30. Analysts from JP Morgan India say reported net debt is at its highest. in two years. Capex was Rs 32,534 crore in Q2, up from Rs 31,442 in Q1. The company said the increase in net debt can be attributed to higher working capital with dispersion in the energy market, unfavorable foreign exchange movements and the settlement of the first part of the 5G spectrum purchased during the quarter.

RIL has rapidly written off debt since 19 through trusts in infrastructure investments, selling shares in consumer businesses and rights issues. Posted, “RIL is returning to an intense investment cycle with ambitious new commercial plans and green energy aspirations. Analysts from Ambit Capital say the company’s equity and debt have increased. RIL’s new energy initiatives are lengthy and carry significant implementation risks,” they said in an October 22 report.

RIL’s rising debt levels coupled with its relatively low outlook for its O2C segment mean that meaningful performance triggers in RIL stock appear limited. “The outlook for the rest of fiscal year 23E has been muted due to the sudden drop in Asian refinery gross margins (falling to $4.05/bbl PPost on October 21, 2022 from highs of $29.5 per barrel in Q1), muted petchem spreads and bullish prices, analysts at ICICI Securities said in an October 23 report.

Meanwhile, the company has announced the classification of its financial services business, which will be renamed Jio Financial Services Ltd (JFSL) and will be listed on stock exchanges. “We view this positively and while we do not see this as a precursor to a potential classifier of various consumer businesses, but it gives shareholders a play on India’s Digital Fintech business,” analysts at JP Morgan India said in an Oct. 22 report. However, RIL could face regulatory challenges here. Analysts have estimated a Rs 1 trillion valuation for JFSL based on RIL’s market capitalization.

Analysts point out that RIL’s rate of return continues to remain low. Given the capex rally, a significant improvement in the company’s profit profile may not come in a hurry.