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What Do Reliance Q2 Results Indicate?

Nov 3, 2020 9:30 AM 4 min read

Reliance Industries, “India’s largest unicorn”, reported its Q2 results on Friday. They were a mixed bag, to put it simply.

The conglomerate’s profit dropped 6.6% YoY to ₹10,602cr ($1.4bn) in the September quarter. Meanwhile, consolidated revenue from operations fell 24.2% YoY to ₹1.16Lcr ($15.5bn). 



Across segments, the results were varied.

On one hand, revenue from oil & gas - which is typically a cash cow for the company - declined 29.8% QoQ to ₹355cr ($47.6m) primarily due to lower price realisation and decline in production. And Reliance Retail posted a 14% decline in operating profit while revenue remained flat.

But on the other hand, Jio - the company’s telecom arm - registered a 19.8% QoQ growth in net profit at ₹3,020cr ($405m). And revenue from its media business grew 31.5% QoQ to ₹1,061cr ($142.2m).

However, regardless of the hits and misses, the company’s Q2 earnings and top line beat most analysts’ estimates.

But markets greeted the results in a rather lukewarm manner. At market close on Monday, RIL was down 8.69%.


Why? There may be two main drivers to this trend.


One: All’s Not Well With Oil

Half of RIL's revenue stems from its centrepiece oil and gas businesses. These have been hit hard by the COVID-19 pandemic.

The Singapore gross refining margin is the Asian benchmark for what a refiner earns on processing every barrel of crude. It stood at a mere $0.05 per barrel in Q2 (compared with minus $0.9 in the preceding three months).

Low global demand has hurt output by refineries. And even though the Indian economy is gradually getting back on its feet, demand is still volatile, the virus is still spreading, and margins are still under pressure.



But even as RIL’s oil fortunes fell, its consumer-oriented businesses experienced relatively robust growth, cushioning the blow. Case in point: Financial Services and Digital Services were the only two segments to register a YoY revenue growth in July-September this year.

But there’s a catch. Which brings us to...


Two: Jio is Still #1, But Airtel’s Catching Up Quick

On a standalone basis, Jio’s Q2 numbers seem good. But if Mr. Ambani was to compare these to the Q2 numbers of Airtel - Jio’s largest competitor - his brow might furrow a little.



Since Jio entered the 4G segment four years ago, it has disrupted the entire industry with its dirt cheap prices and relentless expansion, leaving its peers in the dust and swiftly becoming the market leader.

Now, it appears, Airtel is slowly but surely catching up. Its net subscriber additions were nearly twice that of Jio’s in Q2 (mainly in the 4G segment). Its churn has climbed down to the same level as that of Jio’s (who’s churn increased in the same period). Quarterly revenue growth of both telcos is now similar, and to Jio’s worry, Airtel’s Average Revenue per User (ARPU) is much higher than its own.

FYI: Churn is a measure of the number of subscribers that terminate or discontinue their service with a carrier. And ARPU indicates how much revenue a company can generate from an individual customer. For a broader discussion on Indian telecom, read this article.

Moreover, Jio’s revenues reportedly include an incremental contribution of about ₹200cr ($26.8m) from the fixed broadband segment, where the company started charging subscribers this year. And the ban on international travel has hurt Airtel’s roaming revenues. Adjusted for these, Airtel’s growth rates could even be higher compared to Jio’s in 2020.

Investors were possibly fazed by the bleak oil numbers + expected a stronger fight from Airtel, which could hurt Jio’s margins in the near-term. Ergo the fall in RIL’s share price.


What Next?

As more of the national economy unlocks, demand can be expected to rebound. Particularly so considering the ongoing festival season. This might help RIL’s oil business post better numbers in Q3.

Jio’s tussle with Airtel, however, is a competition we will have to see play out before commenting further. Airtel may prove to be more resilient than expected and take back its place atop the telecom hierarchy. Even Vodafone Idea may stage an unprecedented comeback and make the sector a vibrant and equal-footed three-player market. Or Jio may accelerate its onward march and race ahead. After all, we’re talking about a carrier that just raised  ₹152,056cr ($20m) from the likes of Facebook, Google, Silver Lake, General Atlantic, KKR and Qualcomm, among others.

All in all, what the last quarter must have taught RIL is that its consumer-oriented verticals are more crucial than ever before. In that regard, the roll-out of Reliance Retail’s e-commerce venture - and the green-lighting of its partnership with Future Retail - becomes all the more important.


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