Home / Markets / Mark To Market /  RIL's Q1 Ebitda is at record high, but investors aren't impressed

A key disappointment in Reliance Industries Ltd’s (RIL) June quarter (Q1FY23) results has been the lower-than-expected show put up by the oil-to-chemicals (O2C) business. The operating environment was pretty strong during the quarter with the benchmark Singapore gross refining margin (GRM) averaging at about $20 a barrel, up from $8 a barrel in the March quarter (Q4FY22). This had raised expectations from RIL’s O2C segment, which includes the refining and petrochemicals businesses. In Q1, the O2C segment’s earnings before interest, taxes, depreciation and amortization (Ebitda) was nearly 19,900 crore, up almost 40% vis-à-vis Q4. However, this fell short of expectations, with the O2C segment’s Ebitda being 14% below JM Financial Institutional Securities Ltd’s estimates of around 23,200 crore.

Factors that weighed on RIL’s O2C business in Q1 include a rise in the official selling price for Middle East crude, higher energy and freight costs, and losses in fuel retailing.

Even so, the consumer businesses, telecom and retail, delivered a satisfactory performance, albeit not too exciting. Reliance Jio clocked an average revenue per user of 175.7, up almost 5% sequentially, aided by the residual benefits of tariff hikes in December 2021. Net subscriber additions were robust at 9.7 million. The retail business saw strong year-on-year growth trends in revenue and Ebitda helped by a favourable base. Even so, according to Jefferies India, overall disclosure remains weak at Reliance Retail.

Meanwhile, RIL’s consolidated Ebitda (excluding other income) grew 21% sequentially in Q1 to 37,997 crore, a multi-year high. However, Ebitda missed some analysts’ expectations and was 9% below JM Financial’s estimates. “(RIL’s) Ebitda missed Jefferies estimates’ by 1% on 11% miss in O2C because of weaker than expected refining," said analysts from Jefferies India in a report on 23 July. What’s more, RIL’s net debt has jumped to 57,655 crore in Q1, from 34,815 crore in Q4, which analysts reckon is not encouraging. “Change in net debt (is) because of higher working capital requirement in businesses with increase in energy and product prices," RIL said. Capital expenditure (capex) was high at 31,442 crore in Q1. Note that capex in FY22 was 99,472 crore.

As such, investors looking for meaningful triggers for the RIL stock, which is down 5% so far in FY23, may be a tad disappointed.

Where do we go from here? “The Reliance stock can be expected to remain sideways. There is a bit of a positive sentiment because of the anticipated listing of Reliance Jio and Reliance Retail. While details on this are awaited, this expectation could continue to support the stock," said Nitin Tiwari, analyst at Yes Securities.

On the flip side, however, a potential global recession could weigh on petrochemical /fuel prices and margins. Inflation could also hurt the retail segment, though telecom would largely remain unaffected. “If this (global recession and its impact) plays out, it may shape Street expectations on earnings accordingly," Tiwari said.

Meanwhile, benchmark refining margins have retreated from their highs amid demand concerns. “Reliance’s record profitability seen in Q1 would be difficult to replicate in the coming quarters as refining margins are already weakening," Tiwari said.

Analysts at Jefferies remain constructive on refining margins in CY2022E on expectations of fall in Russian refined product exports and Chinese exports staying muted.

“With the SEZ refinery exempt from export duties, we see room for upside participation if refining margins recover from the depressed levels," the analysts said.


Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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