Reliance Industries results review: Another quarter of robust growth in petchem, Jio

Reliance Industries (RIL) reported healthy numbers for the June quarter, led by strong performance in the petchem, Jio and retail segments. Refining margins were soft, in line with global trends, but record volumes in the petrochemical segment more than compensated for it. Retail too saw yet another quarter of robust growth.

Jio continued to post strong revenue growth, along with an improvement in operating profitability during the quarter.

Segment wise performance

Petrochemicals – record performance

Petchem segment reported record earnings with a 58 percent year-on-year (YoY) increase in realizations and a stellar 95 percent YoY uptick in profitability. Margins improved 370 basis points YoY. The strong performance was driven by 1) robust 35 percent increase in volumes 2) improved realization with uptick in crude 3) commissioning and stabilization of the refinery of gas cracker unit (ROGC) and its downstream units 4) improved polyester margins 5) stable polymer margins 6) rapid growth in domestic demand for petchem products 7) globally improving product prices

Refining – lower refining margin in line with global trend

Refining contributes more than two third of the group’s revenues. Performance was slightly tepid during the quarter with gross refining margins (GRM) at $10.5 per  barrel (bbl) (Q1FY18: $11.9/bbl). However, the softness was in line with weak global GRMs, but a good $4.5/bbl above the Singapore benchmark margins. While revenue increased 43 percent YoY, earnings before interest and taxes (excluding exceptional items) declined 17 percent due to 1) weakness in gross refining margins 2) lower crude throughput 3) adverse movement in Brent-Dubai differentials 4) weak gasoline prices due to higher inventory across the globe and higher exports from China due to low internal growth.

Retail downstream oil business reported strong growth during the quarter with 25 percent YoY increase in gasoline volumes. The company now plans to re-commission fuel outlets in order to drive further volume growth.

Oil and Gas – earning erosion continues

The upstream oil and gas segment saw improved realization with an 8 percent YoY growth in revenue due to rapid uptick in the oil and gas prices globally. However with declining volumes in both domestic (down 11.8 percent) and US shale (down 26.6 percent), the segment EBIT continued to be negative. Incremental production from the CBM block neutralized the dip in production from the KG D6 basin. The company now plans to start monetizing its KG D6 block and drilling work has started in July.

Retail – expanding rapidly

Rapid store expansion, coupled with improved customer engagement processes across all segment, helped the retail segments top-line grow 123 percent YoY during the quarter, despite a high base last year. Margins improved 160 basis points led by emphasis on cost control initiatives and benefits of operating leverage owing to additional stores.

 Fashion - Aggressive store expansion, loyalty programmes, tie-ups with leading foreign apparel brands, foray into the mothercare category, online sales (through AJIO), and higher contribution of private labels should help RR consolidate its strengths better.

Grocery – The quarter saw robust growth across all sub-segments (home and personal care, staples, fruits, vegetables). We believe improved brand visibility with store additions will attract more footfalls and increase volumes.

Reliance Digital – The company plans to undertake integration of its existing 305 physical digital stores with new ‘Jio Points’ and ‘Reliance ResQ’ (the service arm) centres which would help further widen the customer base in the upcoming quarters.

Jio – continues capturing the market

Jio’s operating revenues revenue rose 13.8 percent YoY to Rs 8,109 crore (up 13.8 percent quarter-on-quarter). The division added 28.7 million net subscribers over the last quarter, expanding the subscriber base to 215.3 million at the end of June 2017. Jio achieved a subscriber base of 200 million within 21 months of starting operations.

Despite strong competition, Jio’s ARPU (average revenue per user) witnessed a marginal dip of 1.9 percent QoQ. (Airtel posted a decline of 9.5 percent).

Jio’s EBITDA margins expanded 100 bps to 38.8 percent, a commendable achievement. This was helped by a reduction in access charges (net), which fell from 15 percent of revenues from operations to 13 percent in this quarter (Telecom Regulatory Authority of India (TRAI) cut interconnection usage charge (IUC) by 57 percent effective 1 October 2017).

Outlook

Post the end of an aggressive capex cycle, RIL is now in a sweet spot. Most of its projects are in the monetization phase, and this will boost cash flows in quarter ahead, in turn improving operating efficiencies. The overall macro environment is also quite conducive for the various verticals where the company has exposure.

With full commissioning of the refinery off gas cracker plant, the petchem segment reported a strong growth which is expected to continue and further grow given the rapidly growing domestic demand. With higher vertical integrations, we expect margins in this segment to expand.

The company is now focused on aggressively expanding the retail consumer business presence. We expect the stellar performance to continue and margins to improve further with increasing volumes.

We believe Jio would continue its stellar run, going forward, on the back of significant capacity, latest 4G technology and huge unmet potential available in India.