Credit Suisse downgraded Reliance Industries to underperform from neutral and cut the target price from Rs 1,395 apiece to Rs 995 on Monday citing cautious view on refining and petrochemical cycle and higher liabilities. According to the brokerage, slow enterprise rollout, JioPhone financing and East West Pipeline, and weak Jio average revenue per user (ARPU) in the first quarter of the current fiscal were among the reasons for the downgrade.
On the liabilities side, RIL's liabilities increased from $19 billion to $65 billion in four years. The brokerage added that its target price cut "factors in higher liabilities of $10 billion from crude payables", The Business Standard reported. The company's crude payables are, in fact, higher compared to global peers such as Valero in the US, Korean refiners, and Indian oil marketing companies. "RIL's standalone payable days (mainly crude payables) have increased significantly over the past four years. It used to be in the range of 50-60 days, but was high at 121 days in FY19. Payable days reduced from high of 163 days in FY18 to 121 days in FY19 but are still 2-4 times of peer average. Most of the peers have crude payable days of 30-60 days," the report added.
Furthermore, the Mukesh Ambani-led conglomerate has been free cash flow (FCF) negative for six years. "Given margin pressure in refining and petrochemical (high supply), FCF should be negative for the financial year 2020-21," the report stated. It also cut FY21/FY22 earnings per share estimate by 5 per cent to factor in lower refining and petchem margins.
"We do build upside from IMO 2020 but given high-supply pressure, the duration of benefit may not be long. We expect large capacity additions over the next four years (especially in 2021 and 2022) and together with lower demand, we are cautious on outlook for the refining segment," the brokerage added.
The telecom arm, which recently overtook rival Bharti Airtel, to emerge as the country's second largest player, had a decent first quarter. In Q1, Reliance Jio Infocomm reported a 54.5 per cent jump in revenue quarter-on-quarter to Rs 14,910 crore and nearly 80 per cent jump in profits to Rs 3,080 crore. However, Credit Suisse pegs Jio's capital employed per user at around Rs 7,445 ($105), excluding capitalised expenses, and the current Ebitda per user at Rs 638 ($9) with no rentals on InvIT and benefit of lower access charges. "Return on capital employed (RoCE) currently is low at less than 3 per cent. For Jio to make 9 per cent RoCE, Ebitda per user needs to increase to $16, requiring 50 per cent more price increase in only telecom or through a combination of monetisation through merchant point-of-service network," the report said.