The record revenue and profit performance of India’s most valued company Reliance Industries in the recent June quarter, failed to cheer investors. After shedding 3 per cent in Monday’s trade, the stock closed flat on Tuesday.

Last Friday, Reliance announced its June quarter performance – the company posted all time high revenue and net profit of ₹2,42,982 crore and ₹19,443 crore for the quarter translating into growth of 53 per cent and 41 per cent. However, the net profit number came in significantly lower than the consensus expectation – almost 20 per cent variation between expectation and actual performance. Markets gave a thumbs down to the stock in Monday’s trade. The earnings miss was largely driven by lower-than-expected profit performance in its O2C segment which houses its refining business, even as the company’s retail and telecom segment performance was in-line.              

O2C, which is the company’s largest segment by revenue and profit share (66 per cent of revenue and 50 per cent of operating profit), saw revenue and operating profit grow by 57 per cent and 63 per cent, respectively. Even as the fuel cracks (spread between crude price and the price of refined products such as diesel, petrol, and gasoline) were high for the quarter, operating profit margin was lower-than-expectation on account of higher cost of crude from Saudi Arabia, higher freight costs, losses on domestic fuel retailing business and shutdown of its DHDS unit (Diesel Hydro Desulphurization).

Even as the O2C business missed estimates on the profit front, the other two segments – telecom and retail partially offset for the lower profitability from the former. The company’s retail business posted highest-ever revenue and operating profit of ₹58,569 crore and ₹3,849 crore respectively, translating into growth of 52 per cent and 97 per cent compared to the same period last year. With a total of 15,866 stores across the country, the store additions remained healthy at 792 for the quarter helping the company cross a big milestone in terms of number of registered customers (208 million).

Likewise, the digital services segment (Jio Platforms), saw its revenue and operating profit grow 22 per cent and 26 per cent in the June quarter to ₹28,511 crore and ₹11,707 crore, compared to the previous period. Average revenue per user rose 27 per cent year-on-year to ₹175.7, with a customer base of 419.9 million as of June 2022.

Concerns

 While the June quarter performance of its O2C business has been a bit of a concern for investors, the management’s cautious oil market and price outlook, accentuated concerns over the sustainability of the current performance over the next few quarters. With the global recessionary fears looming large, the management indicated weak demand and pricing environment for global crude prices, which will mean lower margins for Reliance’s refining business. While it may be partially offset by sustained growth in telecom and retail, and O2C accounts for the lion’s share of the overall revenues, the segment performance may remain volatile.

Interestingly, the analyst community has been divided in terms of the business outlook and the stock performance. While institutional brokerage JM Financial, for instance, had downgraded the earnings estimate and target price, global brokerage UBS has upgraded the estimated earnings and recommendation from neutral to buy. The mean consensus recommendation for the stock is positive with a buy rating and an average target price of ₹2,871, implying an over 18 per cent upside from current levels.

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