Oil has become the achilles heel of Reliance

News of a sharp 15% fall in the net profit of Reliance Industries (RIL) for the September quarter sent the scrip on a free fall on Monday, shaving 8.6% off its market capitalisation. By the end of the day, investors in RIL were poorer by Rs 1.2 lakh crore while the company’s largest shareholder, Mukesh Ambani, lost Rs 59,000 crore. He also slipped three positions on the world’s richest list, going down to No.9. 

The company’s consolidated profit slipped to Rs 9,567 crore for the third quarter compared to Rs 11,262 crore for the same period a year ago. The fall was mainly triggered by the plunge in its core businesses—oil refining revenue fell 36% while petrochemicals crashed 23%. 

Reliance Industries is one of the many victims of the pandemic that has sent the world’s oil demand tumbling, triggering a fall in prices and refining margins. RIL, which owns the largest oil refining facilities in the world, saw its margins erode to $5.7 per barrel, almost half of $9.4 a year ago. Had it not been for a massive 187% spike in Reliance Jio’s telecom net profit to Rs 2,844 crore, RIL would have suffered a 
bigger hit. Things may not bounce back easily for the company either.

International brokerage Macquarie’s ‘underperform’ rating said RIL ran a downside risk of 42% from its Friday’s close of Rs 2,054. Reliance and Mukesh Ambani have been acutely aware of not putting all their eggs in the legacy business of oil exploration and refining. There are too many variables such as wars and geopolitical instability that can disrupt this capital-intensive sector. 

Besides, the long-term prospects for the fossil-fuel business are not good, as public opinion builds up in favour of green energy sources like solar power. Telecom and retail—two consumer-fronting businesses—have therefore been RIL’s answer to the drying up of oil. The company launched its retail business back in 2006, but its vigorous push in e-tailing has been a more recent phenomenon with a flurry of fundraising and acquisitions to take on Amazon. Given the shaky prospects of oil, we can only expect these moves to intensify.