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Last Updated : Jul 19, 2019 10:39 PM IST | Source:

Reliance Industries Q1FY20: Retail and Jio drive the show, traditional businesses feel the heat

We remain optimistic about the retail vertical’s revenue growth potential on the back of a large store network pan-India, growing footfalls, adequate warehousing facilities and presence across diversified product categories.

Ruchi Agrawal @ruchiagrawal
Nitin Agrawal @NitinAgrawal65
Krishna Karwa @krishnakarwa152
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-Strong performance in retail segment contributed to steady increase in EBITDA
-Weakness in refining and petchem continues
-GRMs contracted in line with global weakness, lower than expected
-Jio maintained operating margin despite slowdown in customer additions and ARPU

-Investment by Brookfield in the tower business will help reduce debt



Reliance Industries (RIL) reported mixed set of numbers in Q1FY20 where traditional businesses were weaker, but largely in line with global trend. Gross refining margin (GRM) at $8.1 per barrel was a miss on street expectations.

Jio continues to meet expectations in terms of its quarterly performance. Despite slower pace of customer addition, strong competition and falling average revenue per user (ARPU), it maintained its operating margin in Q1 FY20. Brookfield's investment remains the key highlight, which would enable lowering debt.

Retail business came out with strong performance and growth in revenue as well as margins. The segment's increasing contribution to the overall profits is noteworthy.



Key Positives

-Reliance Retail reported a stellar 47.5 percent growth YoY (year-on-year) in its top-line. This was largely led by 265 new stores during the quarter. Operational efficiencies led to margins improving by 60 basis points YoY. In core retail (excluding petro retail and Jio stores), the margin was 8.9 percent.

-Jio witnessed 5.16 percent quarter-on-quarter (QoQ) growth in its net revenue which was at Rs 11,679 crore. Growth returned on the back of net addition of 24.5 million subscribers in the quarter. Jio's subscriber-base stood at 331.3 million.

-What came as a surprise was Jio's 114 bps expansion in its earnings before interest, tax, depreciation and amortisation (EBITDA) margin on QoQ basis.


-The refining and marketing business saw a decent uptick in revenue driven largely by higher throughput. Improvement in gasoline margins was a positive surprise for the segment. Margins in diesel and airline fuel remained largely flat.

Key negative

-While Jio's subscriber base continued to expand, the pace of growth moderated primarily due to base effect and increased competition.

-Strong competition and offers by Jio led to ARPU decline of 3.3 percent on QoQ basis and came at Rs 122 per month.

-GRM at $8.1 per barrel was lower than last quarter as well as the street’s expectation. However it was in line with the global weakness in refinance margins and the challenging global environment for the segment.


-Performance of the petchem segment remained under pressure, with dip in revenue due to decline in volumes. Lower Price realisations in Paraxylene and dip in margins in polyethylene negatively impacted the segment’s profits.


Results were broadly in line with our expectations barring the weakness in the petchem and refining performance. However, we take a cue from the CFO's comments that segmental margins and product cracks are already on a rebound which should help improve performance in the upcoming quarters. Singapore benchmark GRMs in the current month have seen an uptick.

Jio continues to be core focus for expansion and is expected to drive the revenue growth in the coming quarters. We believe Jio would continue its strong show, going forward, on the back of its strategy of deeper and wider market penetration that would continue to disrupt the entire value chain. Further, Jio continues to build capacity in line with increasing data traffic which crossed the 10 Exabyte mark during the quarter. Additionally, its JioGigaFiber services is in its final stages, and early signs have been very encouraging. The company is gradually rolling out enterprise services as well.

An agreement has been entered into with Brookfield Infrastructure Partners L.P. and its affiliates for an investment of Rs 25,215 crore into Tower InvIT. This will be used to repay existing financial liabilities of Jio.

We expect the Brick-and-mortar store expansion to continue across all verticals. Impetus is expected to be laid on tier 3 and 4 regions, where the headroom for growth is huge. Nevertheless, on an already high base, revenue growth may moderate from a quarter-on-quarter perspective. A formal announcement pertaining to the launch of an all-encompassing e-commerce platform is awaited.

We remain optimistic about the retail vertical's revenue growth potential on the back of a large store network pan-India, growing footfalls, adequate warehousing facilities and presence across diversified product categories. However, it’ll be important to keep an eye on how the margin trajectory would pan out. This would be predominantly dependent on benefits of scale in terms of availability of wide assortments, product launches, promotions, and merchandise sourcing.


It is also noteworthy that the company is steadily transforming from a commodity driven business to a more consumer oriented business with increasing contribution of the consumer segments in its EBITDA.  The contribution of Reliance Retail to Reliance Industries’ consolidated revenue and EBIT has been steadily increasing.


We believe this would be value accretive in times to come. Initiatives to reduce leverage is also positive for long term.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

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First Published on Jul 19, 2019 10:39 pm
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