RIL's cash cow milking less money

The results of the country’s largest company by market capitalisation, Reliance Industries (RIL) in the first quarter of the financial year 2023-24 have been poorer than expected.

In the first quarter results released on July 21, RIL’s net profit declined 10.8 percent year-on-year from Rs 17,955 crore to Rs 16,011 crore  while the estimate was around Rs 17,000 crore. The company’s income fell 5.5 percent year-on-year from Rs 2.19 lakh crore to Rs 2.07 lakh crore.

In the results, the performance of consumer related business i.e. retail and telecom has been decent. Profit growth in the retail business may have slowed down, but margins have improved and operating profit along with revenue has been at record levels.

On the other hand, while Jio’s profit remained at a record level, its profit and income growth have been the slowest in the last 6 quarters. Jio’s earnings, operating profits, profits rose only 3% Q-o-Q

Although the oil to chemical business, which contributes about 62 percent to the company’s income, faced most pressure. Compared to the same period last year, the performance of the refining segment was very weak this time due to the sharp fall in crude prices. The income of the oil to chemical business decreased by 17.7 percent year-on-year. The average crude price in the June quarter stood at $78.4, which is $35.5 less than the same period last year.

Brokerage view on RIL
Despite the weak results, most brokers have maintained their ratings and targets. JP Morgan has maintained an overweight rating on the stock and raised the target to Rs 3,040 from Rs 2,696. Similarly, Jefferies has maintained a buy rating and raised the target to Rs 2,935 from Rs 2,846.

But the reports of Morgan Stanley and Macquarie are slightly negative. Morgan Stanley has retained the Overweight rating on the stock but has reduced the target to Rs 3,000 from Rs 3,210. Macquarie is the only broker maintaining the underperform rating on the stock for a long time and has given a target of Rs 2,100, which is also about 15.5 percent below the closing of July 24.

Now the question is whether the stock has gone into the sluggish zone after the results? That is, is it showing exhaustion? Because there is no big trigger for the stock in the short term, the stock has not done much in the last one year.

According to Shrikant Chouhan, Head of Research (Retail), Kotak Securities, “Technically, RIL stock is correcting from the highs created after the JFSL demerger. In the worst case scenario, the stock may slide to ₹2,470 or ₹2,430 and above that, ₹2,530 and ₹2,590 will act as resistance.”

If we leave the demerger of JFSL, then there was no big trigger for the stock. From the height of November 2022 to March 2023, the stock has fallen almost one-sided, that is, due to the demerger of JFSL, the whole movement has been made.

But a section of the market is also concerned about the valuation of JFSL. The concern is whether the market is getting too excited about the valuations of JFSL?

This is because 6.1 per cent of RIL’s net worth was transferred to JFSL. According to the net worth, the value of one share of JFSL is Rs 133, but according to the special pre-open session held on July 20, the price of one share came out to be Rs 261.85, that is a premium of 97 per cent. Now is this premium justified?
This premium is actually on the hope that just like Jio, which left behind Airtel and Vodafone, JFSL will also be a market disruptor leave behind Bajaj Finance and Paytm.
There are two main reasons:
1. The first is that JFSL will be aided by RIL to raise money and
2. It has a strong distribution network be it B2B or B2C

But still, unlike telecom where there were only two big companies, in financial sector JFSL will have to face banks with strong liquidity and customer base apart from NBFCs like Bajaj Finance who have spent last 2 decades in this sector to build their business. It means that JFSL will face stiff challenge from banks, Bajaj Finance and companies like Paytm but to expect that there will be a big change very soon, is less likely.

So, is there any scope for a slight run-up in the stock after the demerger?

On this Shrikant Chouhan says that this scope is not visible in the next 3 months. He believes that during this period RIL stock can remain range bound in the band of Rs 2,400 to Rs 2,700 i.e. it can trade in a range. JFSL is expected to be listed by October i.e. in the next 3 months and only after that the financials of this company will be known and at the same time its quarterly results will be released.