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The real story is about the big digital shift in its business mix
Normally, Reliance announces quarterly results latest by 6 or 6.30 pm. On Oct-30, it announced the results much later at 8 pm. But the results were significant in more ways than one. Apart from the fall in profits, due to weak crude prices, this was the quarter that marked the shift from the old Reliance to the new Reliance. Yes, we are talking about the digital shift. But, first the results!
Written By Shashank Gupta
Table of Content
Refining under strain
If the fall in profits was any indication, it was purely due to slowdown in refining business. The top line and the bottom line of the company took a hit in the Sep-20 quarter as weak crude prices took its toll on the performance of the company. On YOY basis, Brent crude prices are 50% lower on an average. That implies lower GRMs on oil refining and low inventory value on translation. Both these have largely contributed to pressures on the refining business and that had its impact on the Q2 numbers.
Interestingly, even the other related business of petrochemicals came under strain due to low crude prices. While petchem contributed more than refining to the EBITDA of the Reliance group, it was clearly lower than what we have seen in the previous years. With COVID rearing its head again globally, there are fears that the crude prices may remain under pressure. Even a likely supply cut by OPEC & Russia is unlikely to change the equation too favorably for RIL.
Have you seen the value story?
One way to look at the shifting criticality of various businesses is to look at their potential valuations. While RIL is still a conglomerate, recent stake sales in its Jio Platform Unit and Reliance Retail unit give an indicative idea of valuation. As per the stake sale numbers, Jio Platform is valued at $68 billion and RRVL at $58 billion. At the same time, the O2C or Oil to Chemicals business is potentially seen at $75 billion giving a sum-of-parts of $200 billion for RIL. That is roughly the value of the stock today. But do the earnings numbers justify a 63% weight to digital and retail?
Watch for these signals
To understand the signals, let us look at the revenue mix and the EBITDA mix of these businesses separately. The major contributor to revenues was refining at 38% and retail at 24%. Petchem and digital contributed 18% and 14%. The trends coming from EBITDA are a more interesting. Out of the total EBITDA of Rs.20,885 crore, 40% contribution came from the digital business while 29% came from petchem. Refining and retail contributed 14% and 10%. The moral of the story is that going ahead, retail is increasingly going to become decisive to the top line and the digital business will become more significant to the EBITDA. We have already seen the value shift in Reliance. The quarterly numbers for Sep-20 are just corroborating that!