Robust margins in refining and petchems to support RIL's Jio plans

Image: Reuters

Mukesh Ambani

The robust growth that Reliance Industries Ltd’s (RIL) core oil refining and petrochemicals businesses are poised for, will provide a comfortable cushion for the conglomerate’s fledgling telecom venture to grow, without impacting earnings, analysts tracking the company say.

RIL, led by India’s richest man Mukesh Ambani, announced its earnings for the second quarter of FY2017 on Thursday evening and beat Street expectations to post a consolidated net profit of Rs 7,206 crore (excluding an exceptional item related to the transitioning to reporting financials as per the new Indian Accounting Standards), up 43.1 percent from the year-ago period. The company’s turnover in the three months stood at Rs 81,651 crore, up 9.6 percent year-on-year.

RIL’s strong operating performance in July-September 2016 was led by its refining and petrochemicals businesses, both of which reported healthy operating profit margins.

The crude refining segment reported a turnover of Rs 60,527 crore, which remained flat year-on-year, but operating profit grew 9.7 percent to Rs 5,975 crore. The company reported a gross refining margin (GRM) of $10.1 per barrel during the quarter, marginally lower than the $10.6 per barrel reported in the second quarter of FY16. But the reported GRM was $5.1 per barrel higher than the benchmark Singapore GRM, owing to a greater share of diesel in RIL’s product mix (the weightage of light distillates like petrol is higher in the calculation of the Singapore GRM), which enjoyed robust demand and healthy margins.

It was the petrochemicals business that was the star performer for RIL in the September quarter with an all-time high operating profit of Rs 3,417 crore, up 35.5 percent over the year-ago period. Revenues from this business grew 5.6 percent in the same period to Rs 22,422 crore. RIL’s earnings statement, issued after market hours on Thursday, attributed robust demand across polymer and polyester products for this performance.

Demonstrating the conglomerate’s capability to start and establish new businesses profitably, the group’s retail business also witnessed healthy growth. Turnover from the retail business—which comprises formats including electronics, apparel and grocery retailing—rose 63 percent year-on-year to Rs 8,079 crore and segment profitability grew 42.1 percent to Rs 162 crore.

RIL is at an inflection point as far as the commissioning of new capital expenditure projects is concerned and these stand the company in good stead for future growth, even as Reliance Jio Infocomm, the group’s 4G wireless services business, takes time to stabilise.

“The bigger story…lies in the outcome of its [RIL’s] $20 billion capex in its core business [refining and petrochemicals] and a similar investment in telecom,” says a research report dated October 21, 2016 by HDFC Securities. “Commissioning of core business projects had begun and will fully flower by the second half of FY2018. We are confident of an incremental Ebitda (earnings before interest, tax, depreciation and amortisation) of $3.5 billion over FY15, from these investments.”

The HDFC Securities report further added that RIL is poised to deliver sustainable (and persistent) Ebitda growth hereon, even if PBT (profit before tax) from telecom is back-ended. “Chemicals and refining are on a roll till FY19, and Jio may well achieve critical mass by then,” the report says.

And all indications point to RIL’s intentions of doing what it takes to grow and stabilise the telecom venture. RIL’s capex towards its 4G business, which offers free voice calls and data services for as low as Rs 150 a month, has touched Rs 1.59 lakh crore till date (including payments made for spectrum in the recent auction).

The company’s management indicated to analysts during an interaction on Thursday that capex at Jio may be stepped up to Rs 2.5 lakh crore by 2020, if needed, depending on data usage and penetration. Jio’s services are being offered free of cost to users through an inaugural promotion till December 31, 2016. The free service may be extended beyond the end of the current calendar year and new promotional offers may be introduced if high levels of call failure persist, the company’s management told analysts. Jio, which has already roped in 16 million subscribers on its network, has said that lack of adequate interconnection points provided by other telecom operators is leading to the high levels of call drops, when Jio subscribers try to make a call to another network.      

RIL says that subscribers on its network consume an average data of 1GB per day, translating to 30 GB a month. A Morgan Stanley research report, also dated October 21, points out that the data consumption per user on Jio’s network at present is 42 times higher than the industry average of 700 MB per month; and that Jio now accounts for 60 percent of overall data usage in India. This “appears to justify the high spending on spectrum and capital,” the report says.

The future potential of the telecom business, along with the growth in revenues and profitability expected once capital projects such as the refinery off-gas cracker and petcoke gasification facilities are completed lead analysts to be bullish on RIL. For instance, an Axis Capital report expects a 14 percent growth in RIL’s net profit between FY16 and FY18.

At the time of filing this report, RIL’s shares were trading at Rs 1,061.10 per share on BSE, down 2.52 percent from its previous close. The benchmark S&P BSE Sensex was down 0.44 percent at the same time. Over the last one year, RIL’s stock price has appreciated around 11 percent.

(Reliance Industries is the owner of Network 18, the publishers of Forbes India)