Reliance opens the year on the front foot

**Krishna** (0:00)
The Daily Brief Today, we looked at two interesting stories. The first one looks at Reliance's recent results, and the next story talks about the fight between try and true color. Welcome back to The Daily Brief show by Zaroda, where we cut through the news to help you understand what's actually happening in the most important stories from business and markets. I'm your host, Krishna, and today is Friday 24th July. Now, Reliance had a strong start to FI27. In the first quarter, their revenue grew 24.5% year-on-year to 3.4 lakh crore, and recurring EBITDA rising 10.1% to a record 54,000 crores, and recurring profit increasing 6.1% to about 23,000 crores. But the profit figure needs some context. On paper, Reliance's profit fell nearly 25% from the same quarter last year. Now, that is because Q1 FI26 included a one-time gain of 8,924 crores from the sale of its stake in Asian Paints. Once this exceptional gain is removed, giving us a fairer comparison of the underlying businesses, Reliance's profit actually grew by 6.1%.
So the reported profit was lower but largely because it was being compared with an unusually high base. Now, the individual businesses themselves have performed better. Now, as always, the story doesn't change significantly between two consecutive quarters. But the nuances of individual businesses have certainly become more interesting, especially as the external environment has changed. Now, let's start with Reliance's core business which is oil to chemical, where it converts oil to oil products like NAFTA, ethane and other products that feed into plastics and polymers. O2C revenue grew by 30.4% compared to the last year, while EBITDA rose 17.2% to about 17,000 crores. That is the segment's highest quarterly EBITDA in 4 years, and management themselves described it as an extraordinary quarter. But in their own words, it was hard fought as it was impressive. After all, last quarter, the EBITDA for this business fell 3.7% on a year-on-year basis. Now, getting crude oil to the refinery itself had become extremely expensive because of the closure of the Strait of Hormuz. Reliance had to pay heavy crude premiums per barrel. Freight rates for cargo ships increased nearly 10-fold, while insurance costs also multiplied. The company had no choice but to work around the clock to source crude from alternative regions.
Now, on top of this, shipping blockades disrupted India's imports of LPG, the cooking gas used by millions of households. Now, to prevent a domestic shortage, the government asked Indian refineries to maximize LPG production.
Reliance responded by increasing its LPG production four-fold, which also took away their resources from their petrochemicals business. Now, Reliance also faced a disruption to its ethane supply. With this US canal route unavailable, the company specialized ships carrying cheap ethane from the US had to take a much longer route around Africa. Now, what went wrong? See, one big advantage came from Reliance's ability to switch between ethane and NAFTA. To make plastics and other petrochemicals, companies need to feed their chemical plants with raw materials such as NAFTA or ethane, a gas that Reliance imports from the US and is a cheaper substitute of NAFTA.
During the quarter, crude oil prices rose sharply, while US ethane prices declined. Reliance is among the few companies globally with the specialized infrastructure needed to import ethane and use it in its plants.
Now, this allowed the company to replace some of the expensive oil-based feedstock with cheaper ethane, saving significantly on raw material cost. Reliance has also added three new very large ethane carriers to its fleet. The second advantage came from a change in the geography. Reliance rerouted its export away from Europe and towards fuel-staffed higher-paying markets in Asia, including Singapore and Australia, which actually earned them better margins per barrel. At the same time, it reduced its dependence on Middle Eastern crude by sourcing more discounted crude from Latin America, Canada, Africa, and Russia. Now, Reliance's distribution numbers don't look real, with its physical stores spread across more than 20,000 physical stores in over 19,000 pincots across India. And it isn't just limited to physical stores. Its digital platforms like Geomart and RGO allow customers to order doorstep service for everything from a packet of milk to a pair of jeans. However, while its gross revenue grew by 7.4% on a YOY basis to over 90,000 crores, its net profit actually declined 14% on a year-on-year basis. Now, there may not be a massive cause for a lullam in this profit decline, though. It appears to be part of a deliberate investment phase. For one, Reliance is spending heavily to build dark stores for its quick commerce business and wants to get to the scale before monetizing it. Interestingly, though, that's a subtle shift from their old strategy of relying heavily on their physical stores as delivery hubs.