Reliance Industries' Quarterly Profits Drop for Third Straight Time: What’s Behind the Decline?

Reliance Industries Ltd (RIL), India’s oil-to-telecom-to-retail giant, reported an almost 5 per cent year-on-year (YoY) decline in its consolidated net profit for the second quarter of FY25.

Despite a challenging quarter due to weakness in its oil-to-chemicals (O2C) segment, the company’s overall performance remained stable on the back of its digital services and upstream businesses, signaling a resilient outlook.

The Mukesh Ambani-led conglomerate’s consolidated net profit for the July-September quarter stood at Rs 16,563 crore, down from Rs 17,394 crore in the corresponding quarter of the previous year.  On a sequential basis, the net profit increased by 9.4 per cent from the June quarter.

This marks the third consecutive quarter of declining profits on a YoY basis, of which the last two were primarily due to its weak O2C business.

RIL’s total income grew 0.65 per cent to Rs 240,357 crore from Rs 238,797 crore in the corresponding quarter last year. Its consolidated earnings before interest, tax, depreciation and amortization (EBITDA) fell 2 per cent YoY to Rs 43,934 crore for the second quarter. The company’s EBITDA margin for the quarter stood at 17 per cent, marginally lower than the 17.5 per cent recorded in the same period last year.

The reported net debt stood at Rs 116,438 crore, reduced by Rs 1,289 crore YoY and was up by Rs 4,097 crore QoQ on account of accelerated capex towards 5G roll-out, expansion of retail infrastructure and new energy business. The capex at Rs 34,022 crore is higher than previous quarter’s Rs 28,785 crore.

Oil-to-Chemicals (O2C)

The company’s flagship O2C business reported poor operation performance as standalone EBITDA fell 23.7 per cent YoY to Rs 12,413 crore compared to Rs 16,277 crore in the year-ago period. It was led by an unfavourable demand-supply balance led to a sharp 50 per cent decline in transportation fuel cracks and continued weakness in downstream chemical deltas.

In addition, QoQ drag was witnessed due to correction across transportation fuel cracks on higher refinery runs in the US which led to increased global supply and subpar demand and weak PE (-8%) and PVC (-6%) deltas despite favourable ethane cracks.

Consumer Segment

Retail sales fell 1.1 per cent YoY at Rs 76,302 crore and EBITDA rose just 1 per cent to Rs 5,675 crore led by weak fashion & lifestyle demand, focus on streamlining of operations and calibrated approach to the B2B business. In addition, the focus remained on Digital commerce and consumer business, improving operating efficiencies on strong footfalls and strengthened digital channels.

The sharp jump in Telecom EBITDA is attributed to the tariff hikes which increased the average revenue per user (ARPU) to Rs 195.1 meanwhile cannibalizing subscribers down by 10.9 million to 478.8 million subscribers, traction in FTTH supported the overall growth as well.

Media Business

The quarterly revenue from the media business fell marginally by 2.1 per cent YoY to Rs 2,118 crore in the September quarter, primarily due to a sharp decline in revenues of the movie segment. News portfolio revenue grew 6 per cent driven by growth in Digital segment advertising revenue, across all brands.

Yes Securities recommended a ‘BUY’ rating on the stock with a target price of Rs 3,500 per share amid expectation of elevated capex levels due to the ongoing 5G roll out, planned petrochemical capacity expansion and planned foray into renewable energy and acquisitions in retail.

However, in the longer run, investments in petrochemical and renewable capacities, along with the 5G rollout, Retail growth and new energy contribution have the potential to drive revenue growth.

The brokerage firm added that the target price is premised upon an operating earnings CAGR of 10 per cent over FY24-27e where O2C and upstream contribution to EBITDA is 37 per cent, rest would come from consumer business, Digital/Retail in FY27.

“We place a BUY rating on the stock on SOTP basis at a TP of Rs 3,500/share. The O2C contributes Rs 684, upstream Rs 173, and Jio platforms and Retail at Rs 884/1698. The new Energy piece adds Rs 200 and a reduction of Rs 138 of Net debt.

Elara Capital expects benefits from tariff hikes in telecom to be diluted by falling margins in the oil-to-chemicals (O2C) segment. “We reiterate Accumulate on Reliance Industries. Key upside risks to our call are IPO plan as regards Digital Services (Telecom) or Retail and further positive developments in the New Energy segment (green hydrogen/renewables/battery),” the brokerage said.

HDFC Securities reaffirmed its “ADD” rating on Reliance, with a target price of Rs 3,350 per share, indicating a 22 per cent upside potential. The domestic brokerage firm’s optimism is based on three factors including a recovery in the O2C business, growth in the digital business driven by improved ARPU and subscriber additions, and potential value unlocking in the digital and retail segments.