India's No.1 company in terms of Annual Net Profits as well as Market Capitalisation, Reliance Industries Ltd., announced it's Q3-FY'17 numbers yesterday. The numbers were fairly good & mostly in line with expectations mentioned by most analysts. In my report here I will focus on things which are generally not mentioned anywhere else. I like to study the progress of a company on a Trailing-Twelve-Months (T-T-M) basis. The study of T-T-M numbers over a period of last 2 or 3 years gives us a fairly good idea of the company's performance trend.
Before we get to the Segment-wise Numbers, first lets quickly have a look at some of the key Consolidated numbers for Reliance Industries Ltd. The following charts are showing the T-T-M progress of RIL's Total Income, EBITDA, Interest Cost & Net Profit figures starting from the period ending December'13 upto period ending December'16. Have a look at the charts:
After hitting a peak of about Rs.4,50,000 crores in June'14, RIL's T-T-M Total Income figure saw a sharp slide and finally bottomed out at about Rs.2,86,000 crores in June'16. There was nothing wrong with the company's performance during this period. The sharp drop in Total Income was purely due to sharp drop in Product prices. 90% of RIL's turnover is contributed by Refining, Petrochemicals and Oil&Gas Production businesses, all of which derive it's product prices from Crude Oil. The Crude Oil prices had started sliding during the 2nd half of the year 2014 and bottomed out sometime in the early part of year 2016. With the Crude Oil prices slowly moving up over the last couple of quarters, we can already see RIL's T-T-M Total Income figure also reflecting the trend. RIL's T-T-M EBITDA chart gives us a better idea of the kind of performance RIL has managed even during the falling product prices regime. While RIL's Total Income started sliding after June'14, it's EBITDA was quite steady around the Rs.45,000 crores mark till September'15, which means the company was able to protect it's profits comfortably even when product prices were falling as it managed it's raw material cycle too very well.
After September'15, RIL has seen it's EBITDA margins genuinely expand from improvement in process efficiencies at both it's Refining as well as Petrochemicals units. Reliance Industries Ltd. has been undertaking a massive CAPEX program for it's Petrochemicals complex, which is expected to help the company improve it's cost efficiency substantially, which will in turn help the company expand it's profit margins. The commissioning of the CAPEX program has started a few weeks ago & will be done in stages over the next few months. We should start seeing it's impact on the company's results from Q4-FY'17 onwards. On one side we will see RIL's EBITDA from it's primary businesses of Refining & PetChem expand over the next few quarters, but we should also be mindful of the fact that RIL's single largest CAPEX program in it's entire history, Reliance Jio Infocom Ltd, is also expected to start billing it's customers from Q1-FY'18. The commissioning of Reliance Jio Infocom Ltd. is expected to be EBITDA negative for the initial year or two. Hence there is a strong likelihood of RIL reporting a Y-o-Y drop in Consolidated EBITDA for a few quarters, starting from Q1-FY'18. Apart from the drop in EBITDA, RIL will also see it's Interest Cost and Depreciation provisioning shoot up substantially from current levels, which might result in wiping out of most of it's Net Profit, atleast for a few quarters. The first couple of quarters of RJIL's commissioning will be the worst for RIL's financial numbers, but things will progressively improve at a rapid pace after that.
Segment-wise Revenue Performance: Currently RIL reports it's results distributed over 5 segments: Refining, Petro-Chemicals, Oil & Gas, Retail and Others (which includes it's Media & Broadband businesses). Once RJIL (Jio 4G) starts billing it's customers, it will form a separate segment.
Let's look at T-T-M progress of RIL's 4 basic operating segments (excluding Others). RIL's primary businesses of Refining & Petrochemicals continue to contribute nearly 90% to the company's Revenues and are responsible for the entire Net Profits. In fact the company is using strong Cash Flows from these businesses to help support & fund it's investments into newer avenues like Media & Telecom.
Refining business of RIL has seen it's T-T-M revenues falling from a peak level of little over Rs.4,00,000 crores to around Rs.2,25,000 crores levels (a drop of about 45% from the peak), which has been steady since the last 3 quarters. Despite the Q-o-Q rise in Crude Oil prices over the last couple of quarters, we are yet to see a noticeable uptick in RIL's T-T-M numbers, mainly because there has not been any significant change in Y-o-Y prices of Crude Oil. Jan-Mar'16 was the quarter when Crude Oil prices had hit the lowest levels in recent years of less than $30 per barrel (though for a short duration only). Hence if Crude Oil prices stay at current levels of $50+ levels during this current quarter, we could see RIL post healthy Y-o-Y growth in Revenues from it's Refining business.
The Petrochemicals business of RIL has done far better than it's Refining business. The T-T-M revenues from RIL's Petrochemicals business dropped just about 20% from it's peak values, bottomed out by the end of June'16 quarter and has already started posting healthy Y-o-Y growth, which is clearly noticeable in the charts. With completion of major CAPEX investments into the Petrochemicals business and it's commissioning, we could see momentum building up further in RIL's Petrochemicals revenues and even bigger momentum in it's profits from these units.
The Oil & Gas production business has faced an even bigger brunt of the fall in Crude Oil prices as it suffered from not just price crash, but even the production at several of the units had to be curtailed temporarily as it because economically unviable to produce when prices were under $45 per barrel. Over the last few months, the Crude Oil price has remained above the $45 levels quite consistently with not much of wild swings as before. Hence many of the Shale Gas units, which had shut production last year, could start producing again now. Any recovery in Revenue levels for RIL from this business will depend on Crude price stability above a certain level and the way the production is ramped up at producing fields.
The Retail business of RIL was growing it's T-T-M Revenues at a steady pace of around 4% Q-o-Q until March'16. This was a healthy growth rate given the extensive competition in this field from not just other Retail chains and standalone stores, but also from the e-commerce biggies. Over the last 3 quarters RIL's Retail business has been posting much faster growth in Revenues, thanks to increased footfalls in it's stores, especially the Reliance Digital stores for Jio Sim cards and LYF devices. Reliance Retail has also started supplying it's devices to other standalone mobile stores in thousands of smaller towns since about June-July'16. RIL's Retail business is now very close to hitting the Rs.30,000 crores T-T-M turnover mark and going by the healthy expected growth pace, we could very well see it hitting the Rs.40,000 crores turnover mark anytime over the next 3 to 5 quarters.
Segment-wise Profit (EBIT) Performance: The charts representing T-T-M Profit (Earnings Before Interest & Tax) for RIL's different segments
show quite different patterns, especially for Refining & Petrochemicals businesses. RIL's Refining business has seen a sharp improvement in it's T-T-M Profits from levels of about Rs.15,000 crores in December'14 to levels of just over Rs.25,000 crores since the last couple of quarters. The trend of increasing profits seems to have come to a halt now as we can see a plateau formation since the last 3 quarters, which has somewhat coincided with trend reversal in Crude Prices. I think it will be an achievement even if RIL manages to keep it's T-T-M Profits from Refining business steady at current levels even during the period when Crude prices are rising. The Refining business is the main Cash Generator for RIL and hence even if it manages to keep the figure steady at around current levels, it will be a very big positive for the company overall.
The T-T-M Profits from Petrochemicals business of RIL started reporting smart growth from the June'15 quarter onwards. The Profit number has already seen a near 50% increase over the last 7 quarters. The trend of increasing Profits from Petrochemicals business is expected to continue at a healthy pace, given the fact that the CAPEX commissioning is underway. I am expecting RIL's profits from Petrochemicals business to grow atleast another 50% from current levels over the next 3 to 5 quarters.
The T-T-M Profit figures for RIL's Oil & Gas Production business only reflect the disastrous period it has faced over the last 6 to 8 quarters due to falling Crude Prices. In fact curtailment of Production has helped limit the losses to not-so-significant levels. I think we will a trend reversal in these figures after another one or two quarters, provided that the Crude Prices remain steady at current levels of improve further.
RIL's Retail business is doing pretty well on the Profit front too, especially over the last 3 quarters. The T-T-M Profit figure from the Retail business currently stands at about Rs.670 crores. Given the strong growth momentum, I think it will hit the Rs.1000 crores mark in the next 3 quarters for sure. And there is scope for continued long term double-digit Y-o-Y Growth in this business even after that.
Telecom Venture: Reliance Jio Infocom Ltd ( RJIL )has been in the news on a regular basis and it's 'Jio' branded 4G services have been in limelight since Aug-Sept'16. As per latest reports, RJIL has already enrolled over 72 million users for it's 4G services across the country and the number is expected to be around 90 to 100 million by the end of March'17. The primary reason for such a large number of users enrolling for Jio 4G services within a span of just a few months is that it is currently offered FREE. As per latest announcement, the service is expected to remain FREE till 31st March'17. This means that during this period, eventhough RJIL incurs all the operational costs of keeping the network online and continue expanding the coverage & capacity, it will not earn any revenue till the end of the FREE period. Starting from 1st January'17, users of Jio 4G service are entitled to 1 GB of Data at 4G speed per day, after which the speed is restricted to 128 kbps. The users have the option to unlock 4G speed again by recharging their account with Rs.51 (for 1 GB data) or Rs.301 (for 6 GB data). The revenues from these recharge options is expected to be negligible till 31st March'17.
As per my estimate, RJIL's Operating Costs (including Interconnect Cost) to keep the Network online must be easily in the region of Rs.1500 to 2000 crores per month, if not more. That means a sum of around Rs.4500 to 6000 crores per quarter is being spent, without earning any revenue from the 4G service being offered. Remember that the expenditure amount mentioned above excludes the Interest Cost on the Debt raised for this venture. All these Expenditures & Interest Costs are currently being Capitalised and will start getting amortised once RJIL's numbers start getting Consolidated into RIL's Profit & Loss account. All this is expected to hurt RIL's Consolidated numbers very badly once it starts recognising RJIL's numbers. The first couple of quarters will be the worst when RJIL's Net Loss could potentially wipe out RIL's Net Profit from other business segments. Things are expected to steadily improve after that, but the pace of improvement will certainly depend on competitive pressures in the industry. The telecom competitors will also react to whatever tariff plans RJIL finally comes up with and hence it will take not just aggressive tariff plans, but also aggressive marketing to get the revenue momentum going. As per my rough estimates, RJIL needs a minimum Average Revenue Per User (ARPU) per month of Rs.300 from about 100 million Paying-Customers to be able to close to covering all it's Operating Costs and Interest Costs.
In the mean time, this extended FREE service period of RJIL is forcing consolidation within the Industry at a rapid pace. Some smaller operators have sold off their auction-purchased 4G-capable spectrum to larger operators. A few other smaller operators are trying to merge together & form a larger force in the market. A couple of other smaller players are still confused on what to do, but their weak financial position will also force them to either merge themselves with a larger operator or shut-down operations in loss making circles & focus on select strong circles. All this consolidation or shut-downs are expected to benefit all the larger operators over the medium to long term, including RJIL. Even though rumours are currently flying that RJIL is likely to extend it's existing offer in slightly altered form beyond 31st March'17, I believe that the more RJIL delays charging it's customers for service, the more damage it is causing to it's image as well as finances. It is quite obvious that RJIL is currently pushing for certain 'Records' in terms of customer enrollments and Network Usage statistics, etc. At the same time it is trying to cause maximum damage to competition. RJIL is able to do all this only because of it's Cash-rich parent's backing. But Regulatory & Financial sense will ultimately prevail and hopefully we should see Fair competition soon.
Before we get to the Segment-wise Numbers, first lets quickly have a look at some of the key Consolidated numbers for Reliance Industries Ltd. The following charts are showing the T-T-M progress of RIL's Total Income, EBITDA, Interest Cost & Net Profit figures starting from the period ending December'13 upto period ending December'16. Have a look at the charts:
After hitting a peak of about Rs.4,50,000 crores in June'14, RIL's T-T-M Total Income figure saw a sharp slide and finally bottomed out at about Rs.2,86,000 crores in June'16. There was nothing wrong with the company's performance during this period. The sharp drop in Total Income was purely due to sharp drop in Product prices. 90% of RIL's turnover is contributed by Refining, Petrochemicals and Oil&Gas Production businesses, all of which derive it's product prices from Crude Oil. The Crude Oil prices had started sliding during the 2nd half of the year 2014 and bottomed out sometime in the early part of year 2016. With the Crude Oil prices slowly moving up over the last couple of quarters, we can already see RIL's T-T-M Total Income figure also reflecting the trend. RIL's T-T-M EBITDA chart gives us a better idea of the kind of performance RIL has managed even during the falling product prices regime. While RIL's Total Income started sliding after June'14, it's EBITDA was quite steady around the Rs.45,000 crores mark till September'15, which means the company was able to protect it's profits comfortably even when product prices were falling as it managed it's raw material cycle too very well.
After September'15, RIL has seen it's EBITDA margins genuinely expand from improvement in process efficiencies at both it's Refining as well as Petrochemicals units. Reliance Industries Ltd. has been undertaking a massive CAPEX program for it's Petrochemicals complex, which is expected to help the company improve it's cost efficiency substantially, which will in turn help the company expand it's profit margins. The commissioning of the CAPEX program has started a few weeks ago & will be done in stages over the next few months. We should start seeing it's impact on the company's results from Q4-FY'17 onwards. On one side we will see RIL's EBITDA from it's primary businesses of Refining & PetChem expand over the next few quarters, but we should also be mindful of the fact that RIL's single largest CAPEX program in it's entire history, Reliance Jio Infocom Ltd, is also expected to start billing it's customers from Q1-FY'18. The commissioning of Reliance Jio Infocom Ltd. is expected to be EBITDA negative for the initial year or two. Hence there is a strong likelihood of RIL reporting a Y-o-Y drop in Consolidated EBITDA for a few quarters, starting from Q1-FY'18. Apart from the drop in EBITDA, RIL will also see it's Interest Cost and Depreciation provisioning shoot up substantially from current levels, which might result in wiping out of most of it's Net Profit, atleast for a few quarters. The first couple of quarters of RJIL's commissioning will be the worst for RIL's financial numbers, but things will progressively improve at a rapid pace after that.
Segment-wise Revenue Performance: Currently RIL reports it's results distributed over 5 segments: Refining, Petro-Chemicals, Oil & Gas, Retail and Others (which includes it's Media & Broadband businesses). Once RJIL (Jio 4G) starts billing it's customers, it will form a separate segment.
Refining business of RIL has seen it's T-T-M revenues falling from a peak level of little over Rs.4,00,000 crores to around Rs.2,25,000 crores levels (a drop of about 45% from the peak), which has been steady since the last 3 quarters. Despite the Q-o-Q rise in Crude Oil prices over the last couple of quarters, we are yet to see a noticeable uptick in RIL's T-T-M numbers, mainly because there has not been any significant change in Y-o-Y prices of Crude Oil. Jan-Mar'16 was the quarter when Crude Oil prices had hit the lowest levels in recent years of less than $30 per barrel (though for a short duration only). Hence if Crude Oil prices stay at current levels of $50+ levels during this current quarter, we could see RIL post healthy Y-o-Y growth in Revenues from it's Refining business.
The Petrochemicals business of RIL has done far better than it's Refining business. The T-T-M revenues from RIL's Petrochemicals business dropped just about 20% from it's peak values, bottomed out by the end of June'16 quarter and has already started posting healthy Y-o-Y growth, which is clearly noticeable in the charts. With completion of major CAPEX investments into the Petrochemicals business and it's commissioning, we could see momentum building up further in RIL's Petrochemicals revenues and even bigger momentum in it's profits from these units.
The Oil & Gas production business has faced an even bigger brunt of the fall in Crude Oil prices as it suffered from not just price crash, but even the production at several of the units had to be curtailed temporarily as it because economically unviable to produce when prices were under $45 per barrel. Over the last few months, the Crude Oil price has remained above the $45 levels quite consistently with not much of wild swings as before. Hence many of the Shale Gas units, which had shut production last year, could start producing again now. Any recovery in Revenue levels for RIL from this business will depend on Crude price stability above a certain level and the way the production is ramped up at producing fields.
The Retail business of RIL was growing it's T-T-M Revenues at a steady pace of around 4% Q-o-Q until March'16. This was a healthy growth rate given the extensive competition in this field from not just other Retail chains and standalone stores, but also from the e-commerce biggies. Over the last 3 quarters RIL's Retail business has been posting much faster growth in Revenues, thanks to increased footfalls in it's stores, especially the Reliance Digital stores for Jio Sim cards and LYF devices. Reliance Retail has also started supplying it's devices to other standalone mobile stores in thousands of smaller towns since about June-July'16. RIL's Retail business is now very close to hitting the Rs.30,000 crores T-T-M turnover mark and going by the healthy expected growth pace, we could very well see it hitting the Rs.40,000 crores turnover mark anytime over the next 3 to 5 quarters.
Segment-wise Profit (EBIT) Performance: The charts representing T-T-M Profit (Earnings Before Interest & Tax) for RIL's different segments
The T-T-M Profits from Petrochemicals business of RIL started reporting smart growth from the June'15 quarter onwards. The Profit number has already seen a near 50% increase over the last 7 quarters. The trend of increasing Profits from Petrochemicals business is expected to continue at a healthy pace, given the fact that the CAPEX commissioning is underway. I am expecting RIL's profits from Petrochemicals business to grow atleast another 50% from current levels over the next 3 to 5 quarters.
The T-T-M Profit figures for RIL's Oil & Gas Production business only reflect the disastrous period it has faced over the last 6 to 8 quarters due to falling Crude Prices. In fact curtailment of Production has helped limit the losses to not-so-significant levels. I think we will a trend reversal in these figures after another one or two quarters, provided that the Crude Prices remain steady at current levels of improve further.
RIL's Retail business is doing pretty well on the Profit front too, especially over the last 3 quarters. The T-T-M Profit figure from the Retail business currently stands at about Rs.670 crores. Given the strong growth momentum, I think it will hit the Rs.1000 crores mark in the next 3 quarters for sure. And there is scope for continued long term double-digit Y-o-Y Growth in this business even after that.
Telecom Venture: Reliance Jio Infocom Ltd ( RJIL )has been in the news on a regular basis and it's 'Jio' branded 4G services have been in limelight since Aug-Sept'16. As per latest reports, RJIL has already enrolled over 72 million users for it's 4G services across the country and the number is expected to be around 90 to 100 million by the end of March'17. The primary reason for such a large number of users enrolling for Jio 4G services within a span of just a few months is that it is currently offered FREE. As per latest announcement, the service is expected to remain FREE till 31st March'17. This means that during this period, eventhough RJIL incurs all the operational costs of keeping the network online and continue expanding the coverage & capacity, it will not earn any revenue till the end of the FREE period. Starting from 1st January'17, users of Jio 4G service are entitled to 1 GB of Data at 4G speed per day, after which the speed is restricted to 128 kbps. The users have the option to unlock 4G speed again by recharging their account with Rs.51 (for 1 GB data) or Rs.301 (for 6 GB data). The revenues from these recharge options is expected to be negligible till 31st March'17.
As per my estimate, RJIL's Operating Costs (including Interconnect Cost) to keep the Network online must be easily in the region of Rs.1500 to 2000 crores per month, if not more. That means a sum of around Rs.4500 to 6000 crores per quarter is being spent, without earning any revenue from the 4G service being offered. Remember that the expenditure amount mentioned above excludes the Interest Cost on the Debt raised for this venture. All these Expenditures & Interest Costs are currently being Capitalised and will start getting amortised once RJIL's numbers start getting Consolidated into RIL's Profit & Loss account. All this is expected to hurt RIL's Consolidated numbers very badly once it starts recognising RJIL's numbers. The first couple of quarters will be the worst when RJIL's Net Loss could potentially wipe out RIL's Net Profit from other business segments. Things are expected to steadily improve after that, but the pace of improvement will certainly depend on competitive pressures in the industry. The telecom competitors will also react to whatever tariff plans RJIL finally comes up with and hence it will take not just aggressive tariff plans, but also aggressive marketing to get the revenue momentum going. As per my rough estimates, RJIL needs a minimum Average Revenue Per User (ARPU) per month of Rs.300 from about 100 million Paying-Customers to be able to close to covering all it's Operating Costs and Interest Costs.
In the mean time, this extended FREE service period of RJIL is forcing consolidation within the Industry at a rapid pace. Some smaller operators have sold off their auction-purchased 4G-capable spectrum to larger operators. A few other smaller operators are trying to merge together & form a larger force in the market. A couple of other smaller players are still confused on what to do, but their weak financial position will also force them to either merge themselves with a larger operator or shut-down operations in loss making circles & focus on select strong circles. All this consolidation or shut-downs are expected to benefit all the larger operators over the medium to long term, including RJIL. Even though rumours are currently flying that RJIL is likely to extend it's existing offer in slightly altered form beyond 31st March'17, I believe that the more RJIL delays charging it's customers for service, the more damage it is causing to it's image as well as finances. It is quite obvious that RJIL is currently pushing for certain 'Records' in terms of customer enrollments and Network Usage statistics, etc. At the same time it is trying to cause maximum damage to competition. RJIL is able to do all this only because of it's Cash-rich parent's backing. But Regulatory & Financial sense will ultimately prevail and hopefully we should see Fair competition soon.
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