Earnings from O2C division may remain volatile for Reliance Industries

Reliance Industries (RIL) earnings from oil-to-chemicals (O2C) division are poised to remain volatile and range-bound, a top company executive and analysts said.

The oil-to-telecom conglomerate on Friday reported a 9.3 per cent year-on-year (Y-o-Y) increase in its consolidated net profit for the quarter ended December 2023.

This was tempered by weakness in the energy segment, which offset steady profit growth in RIL’s retail and telecom businesses.

RIL’s management noted that while the refining margins environment looks favourable, the downstream remain under pressure.

The O2C business comprises RIL’s refining, petrochemicals, and fuel retailing business divisions.

“Overall, the O2C earnings are going to remain a little volatile because of market disruptions,” said V Srikanth, chief financial officer, in a post-earnings address on Friday.

The Street view on the segment also aligned with RIL’s management.



 

Analysts with Jefferies in their post-earnings note said that margins for the O2C business are likely to remain range-bound.

“Near-term pressure may remain in the O2C segment,” noted analysts with Centrum in a report on Saturday.

Emkay said, “The global O2C outlook remains contingent on China’s demand-supply outlook.”

For Q3FY24, the O2C division’s Ebitda registered a marginal rise of 1 per cent year-on-year (Y-o-Y) at ₹14,064 crore, which the company said was muted because of the planned maintenance and inspection shutdown.

Ebitda is earnings before interest, taxation, depreciation, and amortisation.

In addition to the shutdown, lower downstream chemical margins also partially offset gains from higher gasoline cracks and advantageous feedstock sourcing.

This weakness in the downstream chemicals business is expected to continue.

Analysts at Emkay raised their O2C Ebitda estimates across FY24-26E by two-four per cent each, led by a better refining margin outlook. Going forward, they expect petrochemical margins to remain weak.

 “One can be constructive on refining margins in this environment of continuing demand for these products,” Srikant said, referring to the demand for jet fuel cracks.

He added, “Gasoil cracks are expected to remain firm, given the demand for jet fuel as well as the fact that there is limited availability of heavy crude.”

The global jet fuel demand, according to the company’s Q3FY24 investor presentation, improved by 1.1 million barrels per day (mb/d) Y-o-Y to 7.6 mb/d.

For the petrochemicals business, the weak demand overhang of the Chinese is poised to stay longer.

“Downstream margins do remain a bit pressured on the backdrop of feedstock prices being high as well as demand from China still remaining tepid,” Srikant explained.

 “Petchem prices overall are expected to be range-bound, as new Chinese supplies enter the market,” analysts with Emkay noted in their report.

Domestic demand for petrochemicals, however, is set to get a boost due to the upcoming general elections, noted analysts with Jefferies.