“We note leverage has already been declining and will likely continue to come down in FY21 (2020-21, Apr-Mar) as well even in our bear case scenario,” the brokerage firm said in a research note. Goldman Sachs believes that RIL can reduce its net debt by generating internal free cash flow. RIL’s total outstanding debt on Dec 31 stood close to 3 trln rupees. RIL had earlier said that it expects the company to be net debt free by March 2021 by divesting some assets in the oil-to-chemical business as well as telecom infrastructure.
The brokerage is of the view that the hydrocarbon business of the city-based company can deliver positive cash margins even in a recessionary environment given high complexity of refineries and diversity in feed and products. “We believe market still doesn’t fully appreciate the “unique” hedges in its hydrocarbon business, which would drive positive cash margin even during recession with limited volume risk,” the brokerage firm said. Further, free cash flow will also be generated from the telecom business and the grocery segment in the retail business despite the impact of the coronavirus pandemic related lockdowns.
For the brokerage, however, the biggest source of increase in free cash flow for RIL will be a reduction in capital expenditure in the coming years. Goldman Sachs believes RIL can temporarily put off unnecessary capital expenditure in the refining and chemical business. Goldman Sachs expects a rapid recovery in the company’s earnings beginning from Oct-Mar as it expects earnings of telecom, retail and petrochemical operations to be resilient to the weak macro-economic environment. The brokerage expects the consumer-facing business to account for 50% of RIL’s consolidated earnings from next financial year with the ability to fund their own capital expenditure and contribute to generation of cash flows at consolidated level. However, the brokerage believes that the retail segment could be hurt if nation-wide lockdown is further extended to contain the spread of the coronavirus as it will lead to slower earnings recovery.
In the quarter ended March, Goldman Sachs sees RIL’s earnings before interest, tax, depreciation and amortization declining 8% on quarter to 205 bln rupees. The brokerage expects petrochemical segment earnings to be flattish as margins already reached the trough in Oct-Dec. Goldman Sachs sees a steeper decline in refining operations’ earnings due to inventory loss, which will be partly be offset by growth in telecom earnings. The brokerage firm has retained its 'buy' rating on the stock with a price target of 1,550 rupees, implying potential gains of 30% over the next 12 month.
