RIL continues upward march after Jio Financial demerger announcement

• The stock of the oil-to-retail conglomerate rallied on Monday after an update on its Jio Financial Services demerger.
  
• The demerger will provide analysts with more disclosures which will allow investors to build in a value for the financial services business.
  
• RIL is expected to report a strong Q1, on the back of improving tailwinds in its energy business.
  

After hitting a 52-week high on Monday, Reliance Industries has continued its upward march on Tuesday and is trading around a percent in the green. The stock is up 0.8% as of 1:45 pm. The scrip rallied a day before after it set July 20 as the date for determining the equity shareholders of RIL entitled to receive shares of Jio Financial Services (JFSL).

The demerger of JFSL from the parent company has received the required National Company Law Tribunal (NCLT) nod. As part of the scheme, 6.1% of treasury shares in RIL will be transferred to JFSL. RIL shareholders will get shares on a 1:1 basis in JFSL.

The demerger and the launch of financial services companies has been one of the triggers for the stock which has been on an uptrend in the last three months.

“More disclosures like updated book value, asset/ liability transfer details should allow investors to build in a value for JFSL beyond the RIL treasury stake it would own,” said a report by J P Morgan.

JFSL plans to launch a consumer and merchant lending business based on proprietary data analytics which will supplement the traditional credit bureau-based underwriting.

“With access to a wide retail footprint and strong subscriber base, Reliance has a competitive edge in terms of data that it can leverage to scale up its financial services business,” said a report by Centrum Broking.

RIL operates 18,040 retail stores with a registered customer base of 249 million. Its telecom operations has a subscriber base of 433 million as of April 2023.

Hitting its peak debt

As the earnings season sets in, RIL is expected to report a strong Q1, on the back of improving tailwinds in the oil-to-chemicals or O2C business.

“Energy accounts for half of RIL's profit and saw the most significant downgrade in consensus estimates last year with the windfall tax and destocking cycle in chemicals. With those headwinds now behind it, RIL should see Oil to Chemicals EBITDA decline only slightly, at 4% QoQ, despite the significant correction in refining margins,” said a preview by Morgan Stanley.

EBITDA is earnings before interest, tax, depreciation and amortization.

More importantly however, RIL has been investing heavily in the last few years and this seems to be hitting a peak. Over the past year, its net debt has risen $18 billion which also includes spectrum liabilities.

“We believe RIL will continue to invest$17 billion annually, i.e., close to its operating cash flow, but with the mix of investment shifting from retail, upstream gas and telecom toward new energy and chemicals,” says Morgan Stanley.

According to J P Morgan, the key near-term event to watch for would be the annual general meeting (AGM) which will provide incremental updates on the group’s various new-age businesses.