Reliance's O2C business likely to face pressure for rest of FY25: Analysts

Challenges in retail and refining remain key to reversing downgrade cycle, say analysts

Reliance Industries’ (RIL’s) oil-to-chemicals (O2C) business is likely to remain under pressure for the remaining of the current financial year, according to analysts and company executives. “Management guides for softness for the next couple of quarters in both retail and O2C businesses,” analysts at BOB Capital Markets noted in an after-results report on RIL on Tuesday.

For the July-September quarter (Q2) of 2024-25 (FY25), RIL’s O2C business reported a 5.1 per cent year-on-year increase in revenue to Rs 1.55 trillion. However, earnings before interest, tax, depreciation, and amortisation (Ebitda) for the segment dropped 23 per cent to Rs 12,413 crore, with a 300-basis point reduction in Ebitda margins. Terming Q2 a challenging quarter, analysts at Morgan Stanley said they expect cyclical challenges in retail and refining to ease in 2025, which will be key to reversing the estimate downgrade cycle.

BOB Capital Markets report also indicated that RIL’s earnings have likely bottomed out, though softness may persist for a few quarters. Analysts at HSBC agreed, observing that O2C is expected to remain subdued due to weak macroeconomic conditions and new capacity commissioning. In RIL’s Q2 consolidated Ebitda of Rs 43,934 crore, O2C contributed Rs 12,413 crore. Analysts at Nomura estimated that refining margins of $8 per barrel decl­ined by $0.5 per barrel sequentially in Q2 due to weaker transport fuel spreads. JP Morgan analysts observed that margins for RIL’s petrochemical (pet­chem) business have not been encouraging so far in October. “A cold winter cou­ld seasonally support diesel demand. How­e­ver, our tracker of RIL’s petrochem portf­olio margins has remained weak thro­ugh the first half of October,” they said.

Others, such as Jefferies, have further reduced their Ebitda estimates for the O2C business, citing declining diesel demand in China and unprecedented weakness in petchem spreads due to weak demand in China and India.

“Our current earnings per share forecasts are baking in rather pessimistic expectations for retail and O2C, which leaves room for positive surprises,” they added.

In contrast, Nomura analysts remain optimistic, viewing the commencement of new energy operations as a potential catalyst for RIL in the coming months. Mukesh Ambani, chairman and managing director, announced on Monday that the first of the company’s new energy gigafactories is on track to begin producing solar photovoltaic modules by the end of this year.