A major disappointment in Reliance Industries Limited’s (RIL) June quarter (Q1FY23) results has been the lower-than-expected performance presented by the oil-to-chemicals (O2C) business. The operating environment was quite strong during the quarter with the benchmark Singapore Gross Refining Margin (GRM) averaging around $20 a barrel, up from $8 a barrel in the March quarter (Q4FY22). This had raised expectations from RIL’s O2C segment, which includes refining and petrochemical businesses. In Q1, the O2C segment’s earnings before interest, tax, depreciation and amortization (Ebitda) was approx. 19,900 crores, up almost 40% as compared to Q4. However, it fell short of the expectations, with the O2C segment’s Ebitda being around 14% lower than JM Financial Institutional Securities Ltd’s estimate. 23,200 crores.
Factors that weighed on RIL’s O2C business in Q1 include an increase in the official selling price of Middle East crude, higher energy and freight costs, and losses in fuel retailing.
Nevertheless, consumer businesses, telecommunications and retail, delivered a satisfactory performance, although it was not very exciting. Reliance Jio earned average revenue per user 175.7, about 5% sequentially, aided by residual benefits of tariff hikes in December 2021. Net customer additions were strong at 9.7 million. The retail business saw strong year-on-year revenue growth and a favorable base helped Ebitda. Nevertheless, according to Jefferies India, the overall disclosure at Reliance Retail remains weak.
Meanwhile, RIL’s consolidated Ebitda (excluding other income) grew 21% sequentially in Q1 37,997 crore, a multi-year high. However, Ebitda missed some analysts’ expectations and was 9% lower than JM Financial’s estimates. “(RIL’s) EBITDA missed Jefferies’ estimate of 11% reduction in O2C due to weak O2C reduction,” analysts at Jefferies India said in a report on July 23. What’s more, RIL’s net debt has jumped 57,655 crore in Q1. From 34,815 crore in Q4, which analysts believe is not encouraging. “The change in net debt (is) due to higher working capital requirement in businesses coupled with rise in energy and product prices,” RIL said. Capital expenditure (capex) was higher 31,442 crore in Q1. Note that the capex in FY22 was 99,472 crores.
As such, investors looking for a meaningful trigger for RIL stock, which is down 5% in FY13 so far, may be a bit disappointed.
Where shall we go from here? “Reliance stock can be expected to remain sideways. There is a slight positive sentiment from the possible listing of Reliance Jio and Reliance Retail. While details on this are awaited, this expectation may continue to support the stock,” said Nitin Tiwari, analyst at Yes Securities.
On the other hand, however, a possible global slowdown could impact petrochemical/fuel prices and margins. Inflation could hurt the retail segment as well, though telecom would remain largely unaffected. “If this (global slowdown and its impact) unfolds, it could shape market expectations in terms of earnings,” Tiwari said.
Meanwhile, benchmark refining margins have retreated from higher levels amid demand concerns. “Reliance’s record Q1 profit will be difficult to replicate in the coming quarters as refining margins are already weakening,” Tiwari said.
Jefferies analysts remain constructive on refining margins in CY2022E on declining Russian refined product exports and muted expectations of Chinese exports.
“With SEZ Refinery exempted from export duty, we see room for upward participation if refining margins recover from low levels,” analysts said.
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