Results preview: Poor O2C showing may pull down RIL's revenue, profit

In Q1FY24, it may witness the first YoY net sales decline since Q3FY21 and the sharpest net profit fall since Q2FY21

Reliance Industries may report a muted performance for the April-June quarter of FY24, with most brokerages expecting it to have witnessed a year-on-year (YoY) and quarter-on-quarter (QoQ) contraction in revenue and net profit during the period because of a poor showing by its oil-to-chemicals (O2C) division. 

The O2C division, which includes refining and petrochemical businesses, accounts for a little over half of RIL’s revenue and profit.

A muted showing by RIL in the first quarter of 2023-24 may weigh on the overall corporate earnings, as well as the equity markets. The company tops the league table in terms of revenue, profit, and market capitalisation in the listed space.

According to brokerage estimates, RIL’s consolidated net profit (adjusted for exceptional gains & losses) is expected to have declined by 8.3 per cent YoY to Rs. 16,466 crore in Q1FY24, down from Rs. 17,955 crore a year ago. They also expect a 7.3 per cent YoY decline in its net sales to Rs. 2.03 trillion in Q1FY24, from Rs. 2.19 trillion a year ago. 

Going by these estimates, RIL’s net profit in the April-June period would be nearly 14.7 per cent lower than its record high net profit of Rs. 19,299 crore in the quarter ended March 31, 2023, while its net sales would be 7.3 per cent lower YoY and 4.5 per cent lower on a QoQ basis.

It could be the first YoY decline in RIL’s net sales since the December 2020 quarter (Q3FY21), and the biggest decline in its net profit since the September 2020 quarter (Q2FY21). Earlier, the company’s consolidated adjusted net profit declined for two consecutive quarters in Q2FY23 and Q3FY23.  

Brokerages also expect a decline in RIL’s operating profit or Ebitda (earnings before interest, taxes, depreciation, and amortisation) during Q1FY24 due to a weaker gross refining margin (GRM). RIL’s consolidated Ebitda is expected to have declined by 5 per cent YoY to Rs. 38,169 crore in the quarter under review, against Rs. 40,179 crore a year ago. The company reported a record high quarterly Ebitda of Rs. 41,389 crore in Q4FY23.

The analysis is based on RIL’s Q1FY24 earnings estimates by BofA Securities, Morgan Stanley Research, Motilal Oswal Financial Services, Kotak Institutional Equities, and Emkay Global Financial Services. The final figures are an average of the estimates by these five brokerages.

“We expect RIL revenues/Ebitda to be down QoQ in Q1FY24, mainly on the back of the O2C business (being) partly offset by a continued steady increase in the retail and telco businesses. We estimate O2C earnings before interest and taxes to be down 6.1 per cent QoQ due to a weaker GRM in refinery business offsetting benefits from cheaper Russian crude,” write Sachin Salgaonkar and Shalav Saket of BofA Securities in their Q1FY24 earnings estimates for the company.

Analysts at Morgan Stanley Research, however, expect green shoots in RIL’s Q1 earnings. “Reliance's Q1FY24 earnings will be more about the ‘rate of change’ shifting from four quarters of earnings downgrades to upgrades and net debt increases tapering.” 

“As the chemical destocking cycle ends, global fuel demand shows more confidence in range-bound oil markets, and retail revenue per sqft rises, we expect investors to shift from ‘looking at downside risks’ to ‘what is driving upside’ for consensus estimates,” write analysts at Morgan Stanley Research. 

According to the brokerage, over the past year, RIL’s consensus forward earnings estimates have declined by 16 per cent, and net debt has risen $18 billion (including spectrum liabilities). 

A steady rise in RIL’s net debt in the past 12 months has led to a faster rise in its interest expenses, leading to slower growth in net profit compared to Ebitda growth. This is likely to play out again in the recently concluded April-June quarter. 

Analysts at Emkay Global Financial Services are most bullish on Reliance. “We estimate RIL’s consolidated Ebitda to marginally increase by 1 per cent QoQ to Rs. 388 billion (Rs. 38,800 crore), with O2C Ebitda down 4 per cent to Rs. 156 billion (Rs. 15,600 crore) on lower GRMs, partly offset by a recovery in petchem margins,” write analysts at Emkay.