Can RIL’s capex story take some more twists and turns?

For Reliance Industries Ltd’s (RIL) investors, elevated capital expenditure (capex) level has been a sore point for a while now. The good news is that there are signs that this issue is receding, primarily led by the completion of pan-India 5G roll-out. In the December quarter (Q3FY24), consolidated capex was 30,102 crore, down by 22% sequentially. The sharp drop in capex suggests that peak capex is likely behind.

As such, analysts from Morgan Stanley expect this year to be eventful for RIL as the past two years of investments move into the monetization phase. “We think investment cycles will be shorter than in the past two decades, with limited impact on balance sheet leverage,” said the analysts in a report on 19 January. In Q3, net debt stood at 1.19 trillion, up 1.4% sequentially. The net debt to Ebitda ratio was 0.67x in Q3 and this is expected to be below 1x going ahead. Ebitda is earnings before interest, tax, depreciation and amortization.


To be sure, the pace of capex moderation needs monitoring ahead. For one, RIL’s new energy business is likely to commence by the end of 2024 and it may entail additional investments. Here, any hiccups in execution may play spoilsport. “Whilst we think that RIL’s new energy plan is well thought through, we are reticent in ascribing any option value to this project as most of the announced projects would be used for captive energy consumption,” said an Ambit Capital report on 20 January. Also, the company’s flip-flops on incorporating a new energy subsidiary, merging it into standalone operations and now letting it remain independent convey its trepidation on the returns it can generate from new energy, added Ambit. Coming to RIL’s Q3 results, the weakness in the oil-to-chemicals segment was partly offset by the other verticals leading to a nearly 1% sequential drop in consolidated Ebitda to 40,656 crore.

The oil-to-chemicals segment was hurt due to the planned maintenance, inspection shutdown and lower downstream chemical margins. What’s more, the segment’s outlook is not rosy. The domestic demand is likely to be solid in line with strong economic activities. But the global downstream chemical markets would remain well-supplied in the near term, thus weighing on margin.

The growth in RIL’s retail business was healthy aided by the festive season. “Core revenue per square feet saw a 4% growth year-on-year, after several quarters of decline,” note Jefferies India’s analysts in a 19 January report. However, the core revenue per square foot at about 7,600 is still 30% lower than the FY20 peak and should see a continuing ramp up as new stores mature—this will be a key driver of future revenue growth as the pace of store additions are coming off, added the Jefferies report. In Q3, 124 stores were added versus 406 and 204 stores in Q1 and Q2, respectively.

The oil-to-telecom conglomerate’s other consumer business—Jio saw strong customer additions in Q3 at 11.2 million as it was accelerated by the 5G rollout. But despite that, Jio’s average revenue per user (Arpu) was flat sequentially at 181.70. For one, 5G subscribers enjoy unlimited data currently thus weighing on Arpu. Also, subscriber addition driven by the Jio Bharat phone would have impacted the mix given that it operates in the lower priced segment.

Meanwhile, RIL’s shares have outperformed in the last three months. The stock is up by 18% while the Nifty 50 index rose by only about 10%. A further rally in the stock depends on factors such as tariff hikes, moderating capex and debt levels and successful monetization of the investments.

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