Reliance Q2

Impressive, but concerns over the Jio overhang continues…

Reliance announced its results on 20th October and the results were largely in line with expectations. While the net profits were marginally up on sequential basis, it was sharply up compared to the corresponding quarter last year. The big disappointment was on the Gross Refining Margins (GRM) front which came down from $11.5/bbl in the last quarter to $10.1/bbl. However, this figure is still substantially higher than the benchmark Singapore GRM. Here are the key takeaways from RIL’s Q2…

Net Profits impress…

 The one big positive in the Reliance Q2 results was the growth in net profits on a YOY basis. The net profits for the Sept quarter were up 18% compared to the Sept quarter last year, although the sales figure was almost same. This sharply improves the net profit margin as compared to the previous year. The big contributor to the higher profits was the petchem margins moving up by over 200 basis points. Although petrochemicals contribute less than 25% of total revenues, its contribution to net profits was much higher. Profit of the much larger refining business was almost static but GRMs continue to impress compared to Singapore GRMs.

Margins continue to impress…

 Like most extraction and refining companies, the top-line of Reliance Industries has contracted due to the sharp fall in prices of crude. However, on the positive side, this has helped improve the margins of the company. The company has earned nearly 18% higher profits compared to the same quarter last year despite total sales remaining almost static. This largely is an outcome of the efficiencies that the company has achieved in its refining and petchem business. The refining margins managed to outperform the Singapore benchmark due to the efficiency of its refining assets. In the petrochemicals business, RIL has attained better margins via economies of scale and integration of its processes.

But concerns remain…

If the reaction of the stock was any indicator, there are surely concerns. Principally, there are 2 concerns for shareholders. The upstream extraction business has been sucking a lot of capital and management bandwidth but is yet to attain scale. Crude price remains an issue for economics and the recent cut in gas prices is also negative. But the real concern for the shareholders is over RIL’s massive bet on the telecom space through Reliance Jio. The company has managed to garner 16 million customers in the first month. However, investors need to be convinced that it is a good idea to plough $40 billion from refining and petchem into a competitive and low margin business like telecom. That could be the real challenge for RIL! ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline.

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