Reliance saw O2C margins under pressure in Q2FY23

Reliance Industries (RIL) is one of India’s biggest conglomerates with a presence in oil refining & marketing and petrochemicals, oil & gas exploration, retail, digital services, media, etc. The company on 21 st October’22 announced their Q2FY23 numbers, where they reported a subdued O2C business performance. While for the rest of the business segments, performance was mainly in line with analyst expectations except for profitability from where the company missed the estimates. The main reason for that was the windfall tax on refined fuels and weak refining margins that dented the performance as PAT remained flat YoY while it declined QoQ. Even on the technical charts, Reliance stock can be seen moving mainly in a sideways trend for a year now and has slightly moved up post-announcement of Q2FY23 results. So, let’s now have a broader look over the company’s financials by analysing their Q2FY23 numbers & try to project their future direction.

Reliance results Q2FY23: Flattish YoY PAT growth despite double-digit revenue growth

The company posted a flat net profit of Rs 13,656 crores for Q2FY23, as against Rs 13,680 crores in Q2FY22, down 0.17% YoY. While PAT declined almost 24% QoQ from Rs 17,995 crores reported in Q1FY23.

This was despite the robust revenue growth seen by Reliance, as revenues surged 33.7% to Rs 2,32,863 crores led by a strong performance of the oil-to-chemical, telecom, and retail operations in the quarter. Whereas sequentially, revenue grew 4.3% from Rs 2,23,113 crores reported in Q1FY23.

The revenues that are being reported in Q2FY23 were higher than the broker’s estimates due to higher-than-expected O2C realisation. Further, the revenue grew in double digits YoY as all major segments reported revenue growth. It grew 4.4% QoQ mainly led by the retail segment.

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Reliance results Q2FY23: EBITDA grew both YoY & QoQ whereas margin % fell mainly due to major O2C segment EBITDA decline

In Q2FY23, EBITDA was at Rs 31,224 crores, up 20% YoY (down 17.8% QoQ). EBITDA growth YoY was driven by the retail segment (up 51% YoY) and digital service (up 28.6% YoY).

The margin % which was dragged down to 14% from 16% in Q2FY22 & 17% in Q1FY23, was mainly because of a decline in Q2C segment margins. O2C segment margins were down 5.9% YoY, 40% QoQ on account of special additional excise duty levied on the export of fuels.

At the EBITDA level in FY22, O2C and oil & gas contributed 49% while retail, digital, and others contributed 10%, 34%, and 7%, respectively. The same can be seen in the graph below. A point to be noted here is that oil & gas even though just have a share of 1.5% in total EBITDA but have been seen growing almost 3X times in Q2FY23.

Reliance results Q2FY23: Key Segmental Highlights

Digital Services: 5G all around

Reliance Jio spent aggressively in the 5G auction spending around Rs 88,100 crores to acquire spectrum. It acquired all 5G spectrum bands: 700Mhz/3300MHz/ 26GHz. This has led to Reliance Jio’s net debt mounting to Rs 1.7 trillion. The 5G deployment should intensify CapEx over the next couple of years. Even ARPU saw only a modest improvement of 0.9% QoQ.

Reliance Retail: Increasing footfalls post covid with JioMart now on WhatsApp

Footfalls jumped 23% v/s pre-Covid levels driven by the waning impact of the pandemic, improving customer sentiment and early onset of festivities. Further, it opened 795 stores, taking the total store count to 16,617. It further launched “JioMart” on WhatsApp which saw a resounding 37% of orders from new customers.

Lastly, RIL announced the demerger of its financial services business into a separate entity, which would be renamed Jio Financial Services (JFS). The demerger will be done through a share swap arrangement. The shareholders of RIL would receive one share of JFS for every share held by them.

Univest View along with Technical Analysis

Despite a normalised demand environment, Reliance Retail was able to produce all-time high revenues during Q2FY23. The company’s overall goal is to grow each of its companies through targeted initiatives. To take advantage of the greater India possibility, the company intends to concentrate on improving consumer touchpoints in its future strategy. It is anticipated that Reliance Retail will keep up its aggressive retail network expansion and improve its digital and Omnichannel capabilities.

In order to improve timely order fulfillment across channels, the company is also seeking to develop the infrastructure of its supply chain and is anticipated to invest in doing so. Additionally, the management stated that it would keep bringing on new merchants, improve its own capacity for product design, expand its own brand portfolio, and prioritise scaling up new businesses.

On the technical charts, it is clearly visible that currently, Reliance stock is trading below its price one year back. Even the 50 EMA is below 100 & 200 EMA, not with a very big gap as all three lines are very close to the current market price. While on the long-term horizon, the reliance stock is taking support at 2305 while 2680 is acting as resistance. The share has already tested the resistance two times but couldn’t sustain that. Even after the announcement of Q2FY23 results, the share saw a mixed reaction from investors while the net effect was positive with a slight spike in share price.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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