India’s most valued company Reliance Industries’ (RIL) Q2 FY23 results came in below expectations. The earnings miss was largely on account of the weakness in its oil-to-chemicals (O2C), even as retail, digital services and upstream oil and gas segments stepped up to compensate for the margin losses in the O2C.

Even as the O2C segment revenues grew 33 per cent year-on-year (y-o-y) to ₹1,59,671 crore due to higher crude prices, compared to the same period last year, its EBITDA (Earnings before Interest tax Depreciation and Amortisation) was lower by 6 per cent at ₹11,968 crore.  

According to the management, the slack performance of the O2C segment — which houses the refinery business — was on two counts.

  • One: Lower margins on downstream products such as petrol due to lower realisation, following correction in global crude prices from $125 levels to about $85 levels, impacted margins of this segment. Inventory losses due to the sharp correction in crude prices and higher freight costs also wiped off some profits. The gasoline cracks for the quarter stood at $8.9 per barrel, compared to $29.8 a barrel in Q1 FY23.
  • Two: Imposition of windfall tax (special additional excise duty) on exports of diesel, petrol, and aviation turbine fuel, led to further erosion of O2C segment’s margins. Besides, the company also undertook planned maintenance work at primary and secondary units at SEZ refinery in September, which also resulted in lower production and sales volume.
Retail, digital and gas firing on all cylinders

The other three segments — retail, digital services and upstream oil and gas segments compensated for the underperformance in the refining business.

  • Retail revenues at ₹64,936 crore in Q2 FY23 implies a growth of 43 per cent compared to the same period last year. The company added 795 new stores during the quarter, taking the total stores tally to over 16,000. During the quarter, JioMart, their online platform, was launched on WhatsApp.
  • Digital services revenue grew 21 per cent y-o-y to ₹29,558 crore. Operating profit grew 29 per cent, compared to the same period last year to ₹12,291 crore, implying a margin of 41.5 per cent. Average revenue per user for Jio stood at ₹177.2, implying a 22 per cent growth y-o-y, helped by tariff hike.

Per capita data usage grew to 22.2 GB/month, which is 26 per cent y-o-y growth and 6.7 per cent higher sequentially. With a subscriber base of 427.6 million as of September, Jio ranks first in terms of adjusted gross revenue (AGR) market share. Jio’s 5G rollout is expected to be completed by December 2022 and this should further help the company consolidate its market share, which is about 45 per cent in AGR terms.

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  • The upstream oil and gas segment got a boost from higher price realisation and USD appreciation, given that the realisation is linked to US dollar. Gas production for the quarter from KGD6 stood at 19 million metric standard cubic metres.

Going forward, the company’s investments in the retail (inorganic and organic), telecom (5G) and green energy will be the key drivers to watch out for. As the newer segments continue to contribute more, thanks to the robust growth potential, the vulnerability to oil prices should start waning off in the medium to long term.

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