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Reliance’s Profit Misses Estimates As High Input Costs Bite

RIL posted a lower-than-expected quarterly profit as higher costs offset the gains from refining business.

Mukesh Ambani in 2017. Photographer: Simon Dawson/Bloomberg
Mukesh Ambani in 2017. Photographer: Simon Dawson/Bloomberg

Reliance Industries Ltd., controlled by billionaire Mukesh Ambani, posted a 46% increase in quarterly profit but fell short of market expectations as high costs made a dent to the windfall gains from refining business.

Net income at India’s biggest company by market value jumped 46% to 179.6 billion rupees ($2.3 billion) for the three months ended June 30, according to an exchange filing Friday, but fell short of the average profit of 229.2 billion rupees estimated in a Bloomberg survey of analysts. 

The refining-to-retail conglomerate saw a 55% rise in revenue to 2.23 trillion rupees compared to the same period last year. Total costs surged 51% to 1.98 trillion rupees with raw material costs rising 76% during the quarter, the filing said.

KEY INSIGHTS

  • The earnings come at a time when Ambani’s group is gearing up to spend billions of dollars in a local airwave auction starting July 26 as its telecommunications unit, Reliance Jio Infocomm Ltd., looks to roll out 5G services across India.
    • Reliance Jio, India’s largest wireless operator, has made the biggest earnest money deposit of 140 billion rupees ($1.8 billion) to the government, signaling its ambitions to dominate the upcoming auction.
    • Reliance Jio President, Kiran Thomas, said the company is gearing to roll out 5G services soon and has undertaken field trials. The company added a net 9.7 million subscribers in the first quarter.
  • Reliance’s refining business has been making a windfall from the war in Ukraine this year as it secured cheaper Russian oil shunned by western buyers and stepped up exports to benefit from higher fuel prices. The company gained from spike in fuel cracks due to supply disruptions in Europe, but was impacted by higher energy cost and oil prices, Joint Chief Financial Officer V. Srikanth told an earnings call.
    • According to brokerage firm Emkay, Reliance’s group EBITDA was 10% below their estimates mainly because of the lower earnings from the oil-to-chemicals business.
    • On July 1, India slapped a tax on fuel exports and crude oil production to tap windfall gains from surging prices but slashed it this week. The impact of this policy move will be seen in the September quarter.
  • While the company has stopped revealing its gross refining margins, the Asian benchmark for this metric averaged $21.35 a barrel during the June quarter for complex refineries such as Reliance. Returns from processing crude oil into gasoline and diesel in Asia, however, have plunged since.
  • Reliance’s other income, which is mainly from its treasury operations, fell 47% from last year to 22.47 billion rupees. Finance cost increased by 17.7% to about 40 billion rupees mainly due to increase in interest rates and currency depreciation.
  • Ambani, who transformed Reliance from being just an energy giant to a consumer businesses behemoth, is now putting his succession plan in place. In June, the 65-year-old Ambani made way for his elder son Akash Ambani to become the chairman of Reliance Jio.
    • Akash’s twin sister, Isha, is likely to be appointed chair of Reliance’s retail arm, Bloomberg reported.
  • Reliance, which operates the world’s largest oil refining complex, is pivoting toward green energy where it plans to invest $76 billion. Reliance is building four gigafactories for making electrolyzers for green hydrogen, solar modules, fuel cells and storage batteries.

Market Reaction

  • Shares of Reliance slipped 1.5% in the June quarter compared to 9.5% fall in the benchmark S&P BSE Sensex. Earnings were announced after the close of India market hours.

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  • Reliance Jio reported net income of 43.35 billion rupees, +24% y/y
  • Reliance Jio average revenue per user 175.70 rupees, +27% y/y, on a subscriber base of 419.9 million users
  • Reliance Retail EBITDA 38.5 billion rupees, +98% y/y
  • Debt, as of June 30, was 2.63 trillion rupees compared to cash and cash equivalents of 2.06 trillion rupees

(Updates with quote and brokerage view.)

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