Probal Sen flags muted quarter for Reliance as O2C weakness weighs

In what is expected to be a closely watched earnings release, Reliance Industries may report a subdued set of numbers this quarter, with pressure emerging largely from its oil-to-chemicals (O2C) business. Market participants are likely to keep a close eye on the Nifty heavyweight, given its significant influence on the benchmark index.

Speaking to ET Now, Probal Sen from ICICI Securities noted that expectations have already been tempered.

“So, the numbers are likely to be muted, I think that has pretty much been expected for a while. The OTC segment earnings unlike what you see on the paper markets, the fact is that crude costs have been obviously a constraint in this quarter. There has been some diversion of propylene towards basically production of LPG, away from petrochemical. So, petrochemical throughput has also taken a little bit of a hit and on an overall basis therefore the OTC segment earnings or EBITDA is likely to actually decline from about 165 billion in last quarter to less than 140 billion for Q4 and that pretty much drags overall numbers down as well. What we expect is against 460 odd billion EBITDA on a consolidated level should be close to 440 billion and that means that on a net profit level, net earnings post minority would be closer to about 162-163 billion versus 186 odd billion that they reported in Q3. So, results from the other segments are likely to be flattish to small increases, but it is the continued uncertainty and sort of slightly difficult environment for the downstream petroleum space that is dragging numbers down in this quarter.”

The pressure is not limited to refining and petrochemicals. Retail fuel operations could also take a hit due to continued operations despite weak margins.

“So, to answer your first question, yes, retail losses this time because unlike earlier times where because of lower margins you would see shutdowns in the fuel outlets of private refiners, this time they have actually continued to operate the outlets. So, to that extent, yes, even retail losses are another factor that would impact numbers.

“And as far as petchem is concerned, yes, the margins have improved a bit to be honest but slightly lower throughput means that on an overall basis earnings even for the petrochemical segment only grow by low to mid-single digits on a QoQ level, but there is growth there which is primarily led by margin growth because obviously pricing for certain specific chains has definitely improved after probably multiple quarters of weakness, so that is a small positive,” he added.

However, the company’s Special Economic Zone (SEZ) refinery could offer some cushion, particularly due to its insulation from export-related levies.“That is captured in the numbers that I spoke about. Yes, the SEZ refinery, our understanding is that it is not subject to the export taxes, the additional export taxes that have been announced for domestic refiners, because technically speaking the SEZ refinery is not really considered part of the domestic customs area, so to that extent obviously they are more resilient and the results of the OMCs are likely to show more of a decline to that extent in terms of the refining business, but on an overall basis still the very-very high crude and freight costs, the kind of insurance costs that have risen and the differences in terms of the actual physical crude cost versus what we are seeing on our tickers, I think that all plays a role in any case in keeping the numbers muted despite the benefit, let us say, from the SEZ refinery from not having to pay export taxes.”

On the consumer-facing side, Reliance Retail is expected to maintain steady growth, albeit at a measured pace.
“So, frankly, as far as the retail business is concerned, our sense is that there is a low to mid-single digit quarter-on-quarter improvement that one can see. YoY improvement will still be fairly decent in the range of around 7% to 8%.

“So, the retail performance anyway is going to be fairly high or strong but you have to remember that the kind of base that Reliance works from is very different from any other retail player in the country and that does make a difference in terms of how much absolute growth you can actually expect in the current environment. Jio our understanding from our telecom team is that it will be sort of a flattish quarter-on-quarter basis but that still translates into a fairly strong number on a YoY basis or between 10% to 12% in terms of EBITDA,” he added.

As for the impact of investments in quick commerce and online retail, clarity may only emerge after the company’s official briefing.

“We will have to probably wait for the briefing and the numbers to come through before commenting on it. They obviously had already mentioned in the quarter three briefing that there is a bigger push towards quick commerce or the version that they are following as far as JioMart is concerned, so that is obviously going to continue to play a role in terms of margins and overall operational numbers. But let us wait for the briefing before commenting on that.”

Overall, while segments like retail and telecom continue to provide stability, the ongoing challenges in the energy business are expected to weigh on Reliance’s consolidated performance this quarter.