News Analysis

Muted Q1 performance – Retail, digital save the day for RIL

Anand Kalyanaraman BL Research Bureau | Updated on July 19, 2019 Published on July 19, 2019

It was a muted June 2019 quarter for Reliance Industries (RIL) with consolidated net profit growing just about 7 per cent y-o-y to Rs 10,104 crore. And this growth too, was thanks largely to the push provided by the new-age consumer facing business – retail and digital. The profit of the company’s standalone business – that does not include retail and digital – grew only 2.4 per cent y-o-y to Rs 9,036 crore. Also, this small increase in standalone profit was thanks to lower tax cost – the company’s standalone profit before tax was down 1.7 per cent y-o-y. On a sequential quarter comparison basis, even the consolidated net profit was down about 2.5 per cent.

Hydrocarbon blues

Both the core hydrocarbon-based segments – refining and petrochemicals – were on the back-foot due to a tough operating environment. This included slow global economic growth that dented demand and new global supplies that put pressure on product margins. The gross refining margin (GRM) in the June 2019 quarter fell to $8.1 a barrel from $10.5 in the year-ago period - this translated into a dip of nearly 15 per cent y-o-y in the segment’s operating profit despite volume-aided growth in revenue. The petrochemicals segment too struggled with a 4.4 y-o-y dip in operating profit – hit by both lower volumes and fall in price realization in some products. The oil and gas exploration business saw some decline in losses despite continued dip in volumes — the segment’s contribution though has become marginal over the years.

Retail, digital shine

While the hydrocarbon businesses did badly, consumer-facing businesses perked up the overall performance and saved the day for RIL. Operating profit in the organised retail business was up about 66 per cent y-o-y – this was aided by store expansion in smaller cities that translated into 47 per cent growth in the segment’s revenue. The planned launch of its e-commerce platform is expected to give further heft to the retail business.

The digital services business segment that includes the telecom operations was the best performer for the company - the segment’s operating profit grew nearly 80 per cent on the back of 55 per cent growth in segment revenue. Continued subscriber additions have seen RJio move up to become the second-largest telecom operator in the country replacing Bharti Airtel. RJio’s net profit in the quarter rose nearly 46 per cent y-o-y to Rs 891 crore. The proposed Rs 25,000 crore deal with Brookfield for the tower unit should arm RJio with more financial muscle to fund its expansion plans including the roll-out of its broadband business and 5G bidding.

The consumer-facing segments have been steadily increasing their share of overall profits in line with the company’s plan of their achieving an equal footing with the hydrocarbon business. In the June 2019 quarter, the consumer-facing segments contributed 32 per cent of the consolidated segment EBITDA. This hedged business model approach has stood RIL in good stead in what has been a difficult quarter for the core hydrocarbon business. Value-unlocking, when it happens by the listing of the retail and digital businesses, can provide a good uptick to the RIL stock.

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