Mukesh Ambani lists 3 reasons that impacted Reliance’ O2C business in Q1

Net income at India’s largest company by market value fell 5.4% to 151.4 billion rupees ($1.8 billion) for the quarter ended June 30 compared with the same period last year, according to an exchange filing Friday. That fell short of the average 174.17 billion rupees profit estimated by a Bloomberg survey of analysts.

This is the fifth straight quarter when earnings underwhelmed the brokerage estimates due to a weak performance by Reliance’s oil-to-chemicals, or O2C, businesses.

The refining-to-retail conglomerate reported a 12% rise in revenue to 2.36 trillion rupees, topping analyst estimates. Total costs surged 14% to 2.17 trillion rupees.

“The deep integration and flexibility built into our O2C business model helped mitigate the impact of challenging operating environment,” Ambani said in a statement. “The business was impacted by lower fuel cracks with tepid global demand and ramp-up of new refineries.”

Key Insights

• The weak earnings came after the conglomerate has plowed $60 billion between 2021 to 2023 — its shortest investment cycle in decades — for a number of projects such as expanding the 5G telecom network and building giga factories for green energy.
  • A July 1 note from Morgan Stanley said it expected a big payoff, with Reliance potentially adding $100 billion in market value as new cash flows emerge, business cycles improve and its green energy as well as retail units corner a bigger market share. The stock has already jumped 20% this year.
• Geopolitical tensions in Middle East and Russia, Ukraine and disruptions to the Red Sea transit will keep crude oil market volatile, Reliance’s Chief Financial Officer V. Srikanth said in a media call Friday. But fuel cracks could improve soon on US demand, stronger recovery in international aviation, and likely reinstatement of ban on Russian gasoline exports, he added.
  • The pullback in refining margins is only short term and there will likely be recovery from July-September quarter as Asian refiners reduce run rates in wake of pressure on margins, Goldman Sachs analysts said in a July 10 note.
• Ambani’s consumer businesses — Reliance Jio Infocomm Ltd. and Reliance Retail Ltd. — meanwhile have put up a strong show and the group is cementing its dominance in the entertainment space.
  • Reliance Jio, India’s largest wireless operator, is likely to see a revenue boost in the September quarter after it announced a long-awaited tariff hike in end-June. It creates a case for a public listing in 2025 at a $112 billion valuation, according to Jefferies.
  • Reliance Retail has been expanding into newer formats, such as its beauty platform Tira, and is planning its own brands in food and personal care. It’s also bringing in Chinese fast fashion brand Shein.
• Investors are now waiting to hear about the next set of business milestones from Ambani’s annual address to shareholders. While no date has been announced for Reliance’s shareholder meet, this once-a-year speech has evolved into a high-profile platform for Ambani to announce new initiatives, akin to Warren Buffett’s annual letters to Berkshire Hathaway shareholders.