Probably, the most eagerly awaited results came out late on Friday night. Mukesh Ambani led Reliance Industries reported a 15.05% year-on-year (YoY) drop in consolidated net profit at Rs 9,567 crore. This number was at Rs 11,262 crore for the corresponding quarter last year. The consolidated revenue from operations also fell by 24% to Rs 1,16,000 crore from Rs 1,53,000 crore reported a year ago.
Mukesh Ambani, Chairman and Managing Director of RIL, said: “We delivered strong overall operational and financial performance compared to the previous quarter with recovery in petrochemicals and retail segment and sustained growth in the digital services business. Domestic demand has sharply recovered across our O2C business and is now near the pre-Covid level for most products.”
Let’s have a deeper look at each segment.
Refining & Marketing (R&M)
Economic activity in the R&M segment was highly impacted by Covid-19. EBITDA fell by 50% YoY and 21% QoQ to Rs 3,002 crore. This was because the Gross refining margins (GRM) fell to $5.7/bbl from $9.4/bbl from the same quarter last year. (GRM refers to the earning on turning every barrel of crude oil into fuel.)
Due to the easing of lockdown & preference for personal travel rising, demand for refined oil products like jet fuel saw an increase. The company is positive that the demand for fuels like gasoline and jet fuels will further increase in the third quarter. Even with lower margins, Reliance was able to outperform in the Asia Pacific and European refining margins in the challenging business environment. But with negative global sentiments in the oil market which leads to low GRM, the company might struggle in the longer run.
The telecom arm of Reliance reported another dominant result. Their market share in India’s mobile market reached 35.03%. Reliance Jio declared a 13% quarter-on-quarter (QoQ) and 185% year-on-year (YoY) rise in net profit. EBITDA rose by 8.7% QoQ to reach at Rs 7,971 crore.
Amidst the pandemic, Jio became the first mobile service provider to cross the 40-crore customer mark in India. According to the Telecom Regulatory Authority of India (TRAI), Jio added over 35 lakh subscribers which helped it cross the 40 crore mark. As of September 30, 2020, their total customer base stood at 40.56 crores which 1.8% higher than the previous quarter. Their total wireless traffic also grew by 1.5% and amassed to 1,442 crore GB.
ARPU or Average Revenue per User is an important metric for telecom companies. It helps them to get an idea of how much they are earning from a customer on an average. Jio’s ARPU touched Rs 145 per month this quarter. Last quarter, this metric was at Rs 140 per month. Also, there has been a constant uptrend in Jio’s ARPU from the past four quarters.
Without a doubt, Reliance Jio has been a constant driver for RIL as a whole. Thus, it tells how Reliance wants to position itself as a tech player in the future.
The retail segment of the company rebounded sharply in the second quarter after a huge slump in Q1 due to lockdown. Revenue from operations rose by 30% QoQ to reach at Rs 36,566 crore. Last quarter was marred by the shutdown of retail shops and fears of people venturing out of their home.
In Q1FY20, Reliance Retail reported an EBITDA of Rs 1,079 crores. This quarter, EBITDA has increased by a whopping 86% to Rs 2,006 crores. When compared to last year, the operating profit of the segment fell by 14% as normalcy is yet to be achieved during these COVID times. With easing restrictions, Reliance Retail was able to operate 85% of its stores.
A huge jump in the revenue was noticed in the consumer electronics products. Revenue increased by 2X over the last quarter. The apparel segment of Reliance Retail also registered amazing growth. Revenue from Fashion & Lifestyle was almost at 3X over the previous quarter.
“Increased footfall and store openings have contributed to the rebound in retail revenues, with 85% of stores now open,” V. Srikanth, the joint chief financial officer of RIL.
Apart from the results, RIL has seen some huge investments in their retail arm. Around 8% of the stake has been sold to prominent global investors like Silver Lake, General Atlantic, KKR, Mubadala and a few more. The total investment is amassed to Rs 37,710 crore. At the same time, Reliance Retail has acquired companies like Netmeds, Grab, Nowfloats, C-Square and Shopsense (Fynd).
The petrochemical segment experienced a resurgence in the second quarter. EBITDA reported a rise of 35% QoQ to Rs 5,964. This is still significantly below than Rs 8,964 crore what the company recorded in the same quarter last year.
The overall increase in household spending helped the company to record a 17.8% growth in the total revenue. Q2’s segment revenue stood at Rs 29,665 crore as compared to Q1’s Rs 25,192 crore.
The sequential rise can be attributed to an increase in demand in the agriculture, auto and FMCG sector. The lockdown forced many labours to lose their jobs. This raised the presence of labours in the market, thus, driving the wages expectations lower. It helped the Indian textile industry to get cheaper labour and cut their cost of production.
To sum up
The company showed a strong rebound in its performance when compared to the previous quarter. Yet, it was below what they produced in the same quarter previous year. But that was expected due to Covid-19, right?
Reliance Jio performed better than what the market estimated. Reliance Retail also contributed to give a positive outlook to the market. Petrochemicals displayed a robust fight to give good numbers. But two of the core segments of the company, refining & marketing and oil & gas (upstream), have struggled for another quarter. Main reason? Lockdowns all over the world due to Covid-19.
On one hand, Covid-19 has raised the demand of digitalization which has aided the Jio segment. On the other side, the core business of Reliance, oil & gas continues to struggle. Reliance owns the largest refinery in the world in Jamnagar. It was their oil & gas business which helped them become what it is today. This quarter, the EBITDA through the oil & gas sector (upstream segment) was reported to be – Rs 194 crore. This is way below than Rs 128 crore EBITDA recorded in the same quarter previous year. This has led to some serious concerns on the oil & gas segment of Reliance.
A few days back, Mukesh Ambani displayed his desire to spearhead India’s fight towards renewable energy. How often have you heard a company dealing with crude oil talking about a move to renewable energy at such a massive scale? Mukesh Ambani insisted that shifting towards renewable energy does not mean leaving the oil & gas business completely. But, is it so easy to make such a large shift? You can read more about this here.
Halloween Horror Show! Why Did Reliance Fall?
Halloween is celebrated each year on October 31. Seems like it came on 2nd November for Reliance. You can find how the market performed today here. Reliance’s share price fell by a massive 8.69% to close at Rs 1876. This fall of Rs 178.50 in one day took Reliance on their lowest share price in the past three months. What were the reasons behind such a fall that eroded more than Rs 1 lakh crore of market capitalization?
We can understand three possible reasons behind this. Firstly, negative sentiments due to holding off of Reliance-Future Retail deal. The big bull Amazon has insisted that the deal between the two cannot go ahead as it violates Future’s commitment towards them. Read about this war here. The deal with Future group has huge importance for Reliance to take the next step in the retail segment. If this deal collapses, the speed of growth for Reliance Retail in that sector will be hugely affected.
Secondly, unsatisfactory results. Reliance’s oil business is really struggling due to COVID-19. Demand for oil is struggling to revive. Yesterday, the UK government announced that the second wave of infections has been increasing rapidly. To contain the spread, the UK government has declared another four-week lockdown. Before them, Spain and France have also announced lockdowns in their country. With an increase in cases worldwide and no vaccine as of now, the oil & gas companies may find themselves in a very bad situation once again.
Thirdly, profit booking kicking in. Reliance has been on a relentless upside rally from the past 7 months. With every major announcement of investment, Reliance has gone up rapidly. But this pattern stopped in the previous month when major investments in the Retail segment failed to boost up the price. Thus, there might be a feeling among the investors that Reliance won’t be going up so easily now.
With a subdued performance in a few segments this quarter, people might have just booked their profits rather than hoping that Mukesh Ambani can turn around again. Also, Rs 2,000, being a round number, was a very solid support for investors. As soon as the stock went below it, many stop losses would have been triggered which created a panic among the shareholders to sell the stock.
There are also rumours floating around about Ambani’s health. While this has not been verified, stock prices may crash further if this is verified. It will be very interesting to see where Reliance goes from here. Any negative news will be forcing another big fall in its share price. But can Mukesh Ambani do his magic again?