Reliance profit rises on refining strength, retail spend sparks valuation risk

Reliance Industries reported adjusted net profit of ₹20,946 crore for the April-June quarter, a 16% year-on-year increase. Despite the bottom-line growth, the conglomerate's shares have fallen 18% since January, underperforming the Nifty 50's 8% drop, as investors question the path to profitability in its retail business.

The oil-to-chemicals (O2C) division drove the earnings beat. Segment Ebitda per tonne surged 30% sequentially and year-on-year to ₹10,904, the highest in 13 quarters. This margin expansion stemmed from a 2.6 to 4.4-fold jump in refining margins for transport fuels, driven by global supply constraints linked to the West Asia conflict. Reliance also leveraged its feedstock flexibility, using cheaper ethane or refinery gas instead of naphtha to produce ethylene.

A planned refinery turnaround limited the upside, pushing production volumes for sale down 10% to 15.6 million tonnes. Still, the near-term outlook remains strong as normal production resumes and the company increases US ethane sourcing to defend margins against potential cooling.

Performance diverged sharply in Reliance's consumer businesses. Jio Platforms, the largest Ebitda contributor, saw operating profit rise 4% sequentially to ₹20,865 crore. However, average revenue per user (Arpu) edged up just 1% to ₹215.6, drawing analyst concern over the pace of growth even as higher-margin broadband and fixed wireless access services expand. Management blamed promotional schemes and expects a rebound as offers expire.

The retail segment remains the primary source of investor anxiety. Quarterly Ebitda fell 2% year-on-year to ₹5,935 crore, while the Ebitda margin contracted 75 basis points to 7.4%. Management signaled that aggressive investment in dark stores and digital commerce infrastructure will continue for another nine to twelve months, making it difficult to call a margin bottom.

This spending push is designed to meet an ambitious target of doubling retail Ebitda between FY26 and FY29. Achieving that requires a 26% compound annual growth rate, roughly double the 13% rate achieved over the past three years. The capital intensity, combined with plans for separate listings of Jio and the retail unit, is raising the specter of a structural holding-company discount. Brokerage Motilal Oswal has already applied a 25% discount to Reliance's Jio stake in its ₹1,550 target price. If a similar discount is eventually applied to the retail holding, further downside to the stock's valuation is likely.