RIL’s retail business declined in Q2 . came back strongly

The result is that both the consumer-focused and commodity businesses remain in an upward trajectory. Much of it has already caught the attention of investors, with its share price seeing a rise of nearly 30% over the past three months. “Reliance came out with better-than-expected numbers for Q2FY22. Deepak Jasani, Head of Retail Research, HDFC Securities Ltd. said, improved operating leverage, higher pass-through of product prices and improved performance of retail and oil and gas businesses has resulted in improved profitability.

Although more than half of RIL’s revenue comes from its O2C segment, retail’s contribution seems to have increased as gross revenue now exceeds pre-pandemic levels. For the September quarter, retail Ebitda grew 45.2% compared to a year ago and sequentially, growth was 18%. Ebitda means earnings before interest, tax, depreciation and amortization.

In addition, a favorable revenue mix and continued focus on cost management also helped. It is clear that the easing of the second wave restrictions has resulted in a rapid recovery in the retail sector. “90% of the stores are operational, while in October’21 the customer base is now approaching 90%. Fashion & Lifestyle saw record quarterly sales; Grocery continues double-digit revenue momentum; Consumer Electronics also posted double-digit growth,” analysts at JM Financial Services Ltd said in a note.

The firm reported a 37.3 million sq ft increase in operated area, up 8% sequentially. Given that the festive season has witnessed decent demand, the outlook for the retail segment is upbeat for now. As such, margin has increased to 7.3% from 5.8% in Q1 and 5.5% in the year-ago quarter.

RIL’s core O2C business benefited from expansion in refining margins. For the September quarter, segment revenue grew 58.1% year-on-year. A jump in global oil prices boosted realizations and increased volumes also helped revenues. Refinery throughput was up 11.8% year-on-year for Q2FY22. Ebitda also improved 43.9% year-on-year.

In fact, the benchmark Singapore gross refining margin (GRM) per barrel averaged $3.7 in the second quarter. Reliance earns a significant premium over the benchmark and with the benchmark GRM around $7 a barrel, analysts expect the firm to make further gains.

Morgan Stanley Research reported on October 19 that Asia margins are changing as demand normalises. Especially for diesel and jet fuel, and that sees a significant earnings upside for companies like RIL. Meanwhile, the Petchem segment witnessed moderation in margins on a sequential basis. However, analysts expect the recent price hike to help.

The digital services business didn’t disappoint on revenue and profitability. Average Revenue Per User (ARPU) during the quarter was ₹143.6 per subscriber per month, a healthy growth of 3.7% over the previous quarter. Ebitda margin at 47.0% was an expansion of 390 basis points year-on-year and 10 basis points sequentially. One basis point is one hundredth of a percentile. That said, customer additions were very low for Jio. A subscriber base of 429.5 million at Q2-end meant a net addition of 23.8 million subscribers. This was a decline from a customer base of 440 million in Q1. According to analysts, monitoring of the trend is needed here to assess whether this is an industry-wide trend due to the ongoing chip shortage.

This leaves us with a new energy value chain in which RIL has invested $1.2 billion in recent months. Analysts said acquisitions in the new energy and physical businesses will help create new triggers for top- and bottom-line growth. To be sure, this profit will be visible only a few quarters down the line. Analysts at Bernstein Research in their October 22 note valued the new energy business at $36 billion. The expansion will help accelerate the process of transformation from a commodity player to a new-age diversified firm that can boost valuations.