RIL Q1: Petrochemicals shine, Retail and Jio emerging as growth drivers

Petchem along with refining to continue driving earnings

The markets approached Reliance Industries’ (RIL) June quarter (Q1) results with cheer as the stock gained 1.73 per cent on Friday, ahead of the announcement. While expectations have proved right, the better than estimated results suggest there could be more upside in the RIL stock. Already, the company’s global depository receipts (GDRs) listed on the London Stock Exchange were up 2 per cent, at the time of going to press.

Investments in core businesses such as petrochemicals, and new ones like telecom (Jio) are now paying well. RIL saw exceptionally strong performance by the petrochemicals segment, which beat analysts’ expectations that were already running high. The successful stabilisation of the world’s largest refinery-of-gas-cracker (ROGC), RIL’s downstream units and paraxylene are driving gains as the segment not only reported a 34 per cent year-on-year volume growth, but its profit margins at 19.2 per cent also improved 370 basis points year-on-year and 260 bps sequentially. 

Jio (RIL’s digital services business), which surprised with subscriber additions adding 28.7 million new customers in Q1, also posted average revenue per user or ARPU of Rs 135.4. While these were only marginally lower compared to Rs 137 reported in previous quarter despite competition. Bharti Airtel posted a sharper fall (6 per cent) in Q1. Notably, it is also the highest ARPU by an Indian telecom player. The telecom segment’s profit margins remained stable at 17.8 per cent, while revenues grew 14.6 per cent sequentially. Per capita data consumption rose from 9.7 GB per month to 10.6 GB sequentially, and an improvement going ahead will be looked at very positively, say analysts, given the company’s plans to roll out more digital services. Jio’s profit at over Rs 6.12 billion also beat analysts’ estimates of below Rs 6 billion.

Retail, which had seen a surge in previous quarter, too maintained the uptrend. The segment’s revenue, which had grown 134 per cent year-on-year in March quarter, jumped 124 per cent year-on-year in Q1FY19. More importantly, its profit growth of 266 per cent year-on-year (12.4 per cent sequentially) meant margins improved by 160 bps year-on-year and 20 bps sequentially. 

Refining and marketing segment, the largest contributor (half of RIL’s consolidated gross sales and profit), however posted in-line numbers, which were expected to be a bit soft given the benign light distillate yields (gasoline, naphtha and LPG). The adverse movement in Brent-Dubai differentials compared to a year ago, led to a 5 per cent decline in the segment’s profitability as Gross Refining Margins per barrel from $11 in previous quarter to $10.5. Analysts remain positive on forward prospects as Morgan Stanley said that refining prospects were driven by new fuel rules, petcoke gasifiers and RIL’s high coking capacity. 

Abhijeet Bora at Sharekhan said that he believes refining and petrochemicals businesses would continue to report strong margins supported by the recently commissioned downstream projects, while revenue market share gain for telecom business would strengthen earnings of the digital services business and he maintains buy ratings.