1. Jio’s rising capex with no earning visibility worries RIL investors eyeing refining, petchem returns

Jio’s rising capex with no earning visibility worries RIL investors eyeing refining, petchem returns

Reliance Industries Ltd has shown sustained growth momentum and has strengthened the prospects of cash flows turning positive in the near future, but concerns remain over the continued capital expenditure in Reliance Jio.

By: | Updated: April 27, 2017 6:52 PM
Reliance Industries raised to propose its capital expenditure on Jio, adding Rs 18,000 crore in the current quarter to the Rs 1.79 lakh crore that it has put into the venture so far.

While the fiscal fourth quarter results of Reliance Industries Ltd showed sustained growth momentum and strengthened the prospects of cash flows turning positive in the near future, concerns remain over the continued capital expenditure in its telecom business, Reliance Jio Infocomm Ltd, with low visibility on expected earnings flow.

RIL shares, which recently rose to a nine-year high, closed at Rs 1,408.05 on BSE.

“The big question remains on the Return on Investment (ROI) of the outlays in telecom,” Angel Broking said in a blog post on Thursday. “The company has already sunk in close to $30 billion into the telecom business. Being a high gestation business, it is not yet clear when actually the payback period for the telecom business will start,” the brokerage firm said.

Reliance Industries raised to propose its capital expenditure on Jio, adding Rs 18,000 crore in the current quarter to the Rs 1.79 lakh crore that it has put into the venture so far. Meanwhile, Reliance Jio reported a net loss of Rs 22.5 crore in the second half of the last financial year 2016-17, when it had no revenue as it was running back-to-back promotional offers, signing up customers for almost free.

However, this is like loose change for the behemoth, which had a consolidated net profit of Rs 29,900 crore in full fiscal 2016-17. For the fourth quarter, revenue was Rs 92,889 crore, up 45% on-year, while net profit at Rs 8046 crore rose 12% from the last year. The key driver was the strong Gross Refining Margins (GRM), which, at $11.5 per barrel, was nearly $5 per barrel higher than the Singapore benchmark GRM.

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Analysts worry that the telecom business would eat into the profitability returned by the company’s traditional petrochemicals and refining businesses. “The big challenge now for RIL will be to convince its retail and institutional shareholder that sinking the profits of the oil business into telecom is a good business idea,” Angel Broking said in the post.

RIL has said that 65% of its capital expenditure investments will start returning cash flows in FY18. “There is $40 billion worth of projects in commissioning phase, which doubles their (RIL’s) productive assets,” Jal Irani, Senior VP at Edelweiss Capital Services, had said earlier this year. “We forecast RIL’s free cash flows to rocket from next year as the quarterly Capital Expenditure trend is plummeting,” he had said.

At the same time, RIL has not given any guidance on when it expects Jio’s cash flows to turn positive.“Reliance Jio’s estimated capital expenditure of Rs 18,000 crore in Q1FY18, coupled with no clarity on when spending would stabilise is a negative,” JP Morgan said.

Reliance Jio is the segment of the RIL’s business that attracted most of the attention. It grew at a breakneck speed since the official rollout of services on 5 September 2016 and crossed 50 million subscribers in just 83 days, and 100 million in 170 days, adding at an average rate of six lakh subscribers per day.

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