Reliance Q2 Results

A beacon of hope in a rather dull quarter…

The Reliance Q2 results were surely a beacon of hope in a rather dull quarter. After the rural hit from Hindustan Unilever and the subdued guidance from Infosys and TCS, the 2nd quarter results of Reliance came as a breath of fresh air. It was not just the outperformance but the way Reliance bettered its margins that actually set the tone of the results announcement.

Sustaining net margins…

On a quarterly top-line of Rs.60,817 crore, Reliance reported a better than expected net profit of Rs.6,561 crore. That straightway translates into a net margin of 10.8%. This number puts Reliance among the top performing diversified refining companies in the world. Operating profit margins for Reliance Industries expanded by a full 210 basis points from 14.1% to 16.2% and this growth was aided by a very strong performance by both the key segments of Reliance viz. Petrochemicals and Refining.

Refining and Petchem margins…

Gross refining margins (GRMs) for Reliance Industries in the 2nd quarter came in at an all-time high of $10.60 per barrel. This is the highest ever GRM reported by the company and 20 cents higher than the $10.4 per barrel reported in the previous quarter. This is all the more critical as these margins have come at a time when the benchmark is lower by at least $3-4 per barrel. Even the petrochemical margins (petchem) came in at 12.7%, much higher than was originally anticipated. This underscores the ability of the group to leverage intensively on the assets in the oil business.

Challenges still lie ahead…

For the last few years, Reliance Industries has underperformed the Nifty and Sensex. In short, the price has gone nowhere, apart from being stuck in a narrow range. The first challenge is the massive cash that the company sits on. The market needs to have a clear roadmap on how the company intends to use up its Rs.85,000 crore cash balance. Would it be used to repay the existing debt of Rs.170,000 crore or venture into new business areas? The market is also keen to understand the management thinking on the oil drilling business going ahead.

The other two key ventures of Reliance viz. Retail and Telecom will also be closely watched. Both are long haul businesses and will suck up immense capital. It will be a challenge for the company to keep shareholders interested in these long term bets. The market will be keen to see how Reliance Jio disrupts the telecom business in India, as the group is known to do. While the results are encouraging, there are still many question marks over the stock. That will decide the direction! ©

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