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Home / Markets / Mark To Market /  At Reliance, retail business is becoming a new powerhouse

Reliance Industries Ltd’s (RIL) September quarter performance ticked all the right boxes and some more. While a rebound in refining margins improved the performance of the oil-to-chemicals (O2C) segment, the robust retail segment stole the show. The company’s digital services that houses its telecom firm Jio also showed resilience on both growth and profitability.

The upshot is that both consumer-focused and commodity businesses remain in an upward trajectory. Much of this has already caught the attention of investors, seen in the roughly 30% rise in its share price over the past three months. “Reliance came out with better-than-expected numbers for Q2FY22. Profitability improved due to better operating leverage, higher pass-through of product prices and better performance of retail and oil & gas businesses," said Deepak Jasani, head of retail research, HDFC Securities Ltd.

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

Besides, a favourable revenue mix and continued focus on cost management also helped. It is clear that the easing of second wave restrictions has resulted in a swift recovery for retail. “90% of stores are operational while footfalls in Oct’21 are now getting closer to 90%. Fashion and Lifestyle saw record quarterly sales; grocery double-digit revenue momentum continues; consumer electronics also posted double-digit growth," point out analysts at JM Financial Services Ltd in a note.

The firm reported an increase in the operated area to 37.3 million square feet, up 8% sequentially. Given that the festival season has seen good demand, the outlook for the retail segment looks upbeat for now. As such, margins have improved to 7.3% from 5.8% in Q1 and 5.5% in the year-ago quarter.

Firing on all cylinders
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Firing on all cylinders

RIL’s mainstay O2C business benefited from the expansion in refining margins. For the September quarter, the segment’s revenue grew by 58.1% year-on-year (y-o-y). The surge in global oil prices augmented realizations and a growth in volume too helped revenue. Refinery throughput for Q2FY22 was up 11.8% y-o-y. Ebitda also improved 43.9% y-o-y.

Indeed, the benchmark Singapore Gross refining margins (GRM) per barrel have averaged around $3.7 in Q2. Reliance earns a significant premium over the benchmark and with benchmark GRMs at nearly $7 a barrel, analysts expect further benefits to the firm.

Morgan Stanley Research on 19 October pointed out that Asia margins are inflecting along with demand normalization. especially for diesel and jet fuel, and that it sees a significant earnings upside for companies such as RIL. Meanwhile, the petchem segment witnessed softening of margins on a sequential basis. However, analysts expect recent price hikes 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 3.7% growth over the last quarter. Ebitda margin at 47.0% was an expansion of 390 basis points y-o-y and 10 basis points sequentially. A basis point is one-hundredth of a percentage point. That said, subscriber additions were underwhelming for Jio. A customer base of 429.5 million at Q2-end meant a net addition of 23.8 million customers y-o-y. This was a decline from the customer base of 440 million in Q1. According to analysts, the trend here needs monitoring to assess whether this is an industry-wide trend due to the ongoing chip shortage.

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

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