Petrochem volumes drove compelling Reliance Q3, but Jio stole the show

Reliance Industries (RIL) reported a stellar quarter with strong performance across segments. While refining margins witnessed slight softness, in line with global trends, the earnings were substantially driven by a robust increase in petrochemical volumes. The retail segment threw a positive surprise with a more than doubling of revenues and profits.

However, what stole the show was the performance of the telecom venture, Jio, which in addition to a strong EBIDTA (earnings before interest depreciation and tax) posted its first quarterly after-tax-profit.

Refining: Slight softness but above the Street’s expectation

Despite a slight sequential softness, gross refining margins (GRM) at USD 11.6 per billion barrels (bbl) were up 7.4 percent year on year (YoY) – USD 4.4/bbl above the benchmark Singapore refining margins. While revenues were up 23 percent YoY, EBIT (earnings before interest & tax) slipped by 0.5 percent YoY due to the resumption of supplies after the hurricane season in the United States, which led to some softness in gasoline margins.

However, lower diesel cracks, positive naphtha cracks, weaker fuels and oil cracks and lower Arab light and heavy differential helped in sourcing and improved the overall complex refining margins.

The company now aims to expand its downstream presence, which stands at 1,291 outlets, with a simultaneous increase in overall throughput for petrol and diesel.

Petrochemicals – frontrunner in driving profitability

Petrochemicals segment stood as the frontrunner in driving the consolidated profitability with a record performance during the quarter, driven by an increase in volumes and a favorable product mix. Revenues increased by 47 percent while EBIT was up 73 percent YoY.

Production volume swelled by 7 percent at 8 million tonnes on the back of MEG and polyethylene production along with demand expansion in all major polymer products. The record EBIT was driven by higher margins in polypropylene and downstream polyester products

Upstream segment flattish

While the revenues saw a YoY increase of 34 percent, the profitability remained near flattish despite an increase the crude oil prices during the quarter. The uptick in revenues was largely due to commencement of CBM production and higher oil and gas price realizations. Domestic production declined 15 percent while US shale gas production fell by 14 percent YoY.


Jio reported revenue from operations of Rs 6,879 crores (up 11.9 percent qoq) and added 21.5 million subscribers over the last quarter bringing the subscriber base to 160.1 million at the end of December 2017. This gets translated into average revenue per user (ARPU) of Rs 154 per month (down 1.5 percent qoq), much better than its peers.

In terms of operating margin, Jio reported a significant expansion of 1472.5 bps in its EBITDA margin, which came at 38.2 percent. The expansion was primarily due to reduction in access charges (net), which fell from 34.8 percent of revenues from operations to 15.7 percent in this quarter. Telecom Regulatory Authority of India (TRAI) had cut interconnection usage charge (IUC) by 57 percent effective 1 October 2017).

Additionally, the management attributes this performance to use of efficient 4G technology and significant addition of the paying customers for the quarter.

Organized retail

With the base of the demonetization quarter last year, the retail business delivered an impressive performance across all retail lines. The revenues and EBIT at Rs 18,798 crore and Rs 487 crore more than doubled YoY during the quarter. The company opened 72 new stores and aims to further expand retail presence in coming quarters.

Refinery off-cracker plant fully commissioned

The company has recently completed the full commissioning of the refinery cracker plant at Jamnagar which will use the refinery residue as a feedstock for the petrochemical business thereby ensuring cost advantage with vertical integration. This would help in further improving margins for the petrochemical business.

What next?

Post the end of an aggressive capex cycle. With a net capex at Rs 17,300 crore during the quarter RIL now stands at a sweet spot where most of its projects have started delivering and the company is likely to see a big cash flow boost in upcoming quarters with an uptick in the returns.

With the commissioning of the refinery of cracker plant we expect great vertical integration and higher margins for the petrochemical business, which is already posting aggressive growth.

We believe that Jio would continue to maintain growth momentum on the back of a smart business strategy, latest 4G technology and huge unmet potential available in India. All this is likely to lead to further value unlocking from the telecom venture.