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Reliance Industries got a big boost in its March-quarter earnings from improving profitability at its refining division that helped India’s most valued company deliver profits in line with Street estimates. A continued strength in regional refining margins and optionality of value creation from new energy segments are likely to help the stock sustain its premium valuation. The stock of RIL outperformed the Nifty 50 index by 16% since the beginning of the year and its weight in the Nifty reached nearly 13%.

Operating profit at the oil-to-chemical (O2C) segment – the vertical that captures financial performance of refining and petrochemicals – rose 25% to Rs 14,241 crore driven by superior margins of the refining segment. The full-year revenue of the O2C business crossed Rs 5 lakh crore on high crude oil prices and better realisation of downstream products. The Singapore gross refining margin (GRM) – a gauge of regional refining margins – rose to $8.2 per barrel in the March 2022 quarter, compared with $6.1 per barrel in the previous quarter driven by tight crude and product market conditions, further accentuated by disruption by the Russia-Ukraine conflict.

Regional GRM expanded due to superior product realisation (product cracks in technical parlance) of diesel and ATF as RIL’s refinery has a higher proportion of diesel in its refinery product slate. Consequently, RIL’s GRM grew higher than the regional margins. Every one-dollar higher GRM adds around $500 million to the operating profit of RIL. The boost to earnings from refining is likely to continue for the first quarter of FY23 thanks to regional GRM currently trading at a record level of $26/barrel. GRM is likely to remain elevated as one million barrels per day (mbpd) of Russian refinery capacity has gone offline due to the conflict. Also, about 3 mbpd of global capacity is shut due to the pandemic.

This is the prime reason analysts are estimating GRM of around $12 per barrel for the current fiscal. This would mean contribution from refining could be more than Rs 40,000 crore in FY23. The buoyancy in refining earnings may offset the muted petrochemical performance. Realisation in petrochem softened due to weakness in chain delta. However, the company is optimising the fuel mix by reducing high-cost LNG. RIL has utilised over the last few years in its petrochemical business the multiple input sources it has and managed to keep input costs the most competitive among peers.

Consumer Facing Biz: Quality Focus

On the consumer facing business, it continued its focus on quality of subscribers instead of mere subscriber addition. For the first time in two years, Jio saw visitor location register (VLR) move up to 94%, from around 90%. A rising VLR reading indicates improvement in the subscriber quality. The operating profit of the digital business grew 9% QoQ to ‘10,918 crore, as it continued to benefit from expansion in average revenue per user (ARPU), which reached ‘167 in March 2022, compared with ‘151.6 in the previous quarter. Jio’s total subscribers stood at 410 million and it lost nearly 30 million subscribers owing to SIM consolidation.

Retail: Maintains Momentum

Retail continues to maintain its momentum on footfalls and network expansion. Operating profit in the retail segment rose to ‘3,584 crore, a gain of 16.3% YoY. On a sequential basis, some moderation in growth was witnessed due to the high base impact of the December 2021 quarter. Retail business added 793 stores taking the total tally of stores to 15,196 at the end of March 2022. The Street expects retail segment’s operating profit to grow 30% in the next two years driven by multiple bolt-on acquisitions, continued investment in building complementary offline-to-online infra, and post-Covid recovery.

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