Reliance Industries: O2C shines, but digital commerce push weighs on Q1 earnings

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

Reliance Industries Ltd’s (RIL) net profit attributable to owners rose 16% year-on-year (y-o-y) in the April-June quarter (Q1FY27) to ₹20,946 crore, adjusted for the gain from the sale of Asian Paints shares in the year-ago quarter.

The oil-to-chemicals (O2C) segment was the key driver of profit growth, helped by a sharp rise in gross refining margins (GRMs) and petrochemical spreads. Refining margins for petrol, diesel and jet fuel rose 2.6–4.4x on year as global refining output fell amid feedstock shortages linked to the conflict in West Asia.

O2C also cashed in on its inherent advantage of feedstock flexibility. Petrochemicals such as ethylene can be produced by processing ethane or from gas generated in refinery cracker instead of naphtha, thus boosting margin.

Consequently, O2C Ebitda per tonne rose 30% both y-o-y and sequentially to ₹10,904, the highest in at least the past 13 quarters. However, a planned refinery turnaround resulted in a 10% y-o-y and sequential decline in production volume meant for sale, to 15.6 million tonnes. Even so, the outlook for the O2C segment remains strong, as a recovery in production volumes and increased sourcing of ethane from the US could offset any cooling in profit margin.

RIL’s largest vertical, in terms of Ebitda contribution, Jio Platforms (JPL), reported a steady quarter. Average revenue per user (Arpu) rose just 1% sequentially to ₹215.6. During the earnings call, analysts raised concerns over the slow pace of Arpu growth despite the rising contribution of home broadband and fixed wireless access services, which command much higher Arpu than mobile services.

Management attributed the muted growth partly to promotional schemes and said Arpu should rise as these offers roll off. JPL’s Ebitda rose 4% sequentially to ₹20,865 crore in Q1.

The retail segment, however, continues to disappoint. Q1FY27 Ebitda fell 2% y-o-y to ₹5,935 crore.

Retail Ebitda growth had slowed from 17% in Q2FY26 to 2% in Q3 and 3% in Q4. Investors were therefore looking for signs of a recovery in Q1FY27 and the broader financial year, even as net revenue growth remained satisfactory at 8% year-on-year.

Ebitda margin fell 75 basis points y-o-y to 7.4%. It is difficult to conclude that margins have bottomed out, given management's clarification that RIL will continue investing in dark stores and other initiatives for another 9-12 months to compete in digital commerce.

Management has set an ambitious goal of doubling the retail segment's absolute Ebitda over the next three years, from FY26 to FY29. That would require core retail Ebitda to grow at a 26% compound annual growth rate, compared with about 13% in the three years to FY26.

The RIL stock and benchmark Nifty 50 index hit all-time highs on 5 January, but have since fallen 18% and 8%, respectively. The retail vertical's weak performance, along with the potential emergence of a holding-company discount following the separate listings of JPL and the retail business, may have weighed on RIL shares.

Motilal Oswal Financial Services has a sum-of-the-parts-based target price of ₹1,550 for RIL based on September 2028 estimates. Notably, it has begun factoring in a 25% holding-company discount on RIL's stake in JPL, but not on Reliance Retail.

However, as and when Reliance Retail's listing plans crystallize, a similar discount could be applied to RIL's retail holding, creating a downside risk to the target price.

Manish Joshi is a chartered accountant (passed in first attempt) with experience of capital markets spanning equities, derivatives, investment banking and private equity in various roles ranging from analyst to fund manager/trader. Previously, he worked with BNP Paribas, Karvy Stock Broking and The Financial Express. This rich experience has further helped him improve analytical skills and understanding of various businesses. At Mint, he writes on topics ac...