RIL: Is the 'Reliance" on 'Jio' Justified?

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Reliance Industries’ Q2 FY25 Performance

Date: October 14, 2024

Key Financials:

  • Revenue: ₹2,35,481 crore (up by 0.2% YoY)
  • Net Profit: ₹19,323 crore (down by 2.8% YoY)

Reliance Industries’ second-quarter results for FY25 showcased modest revenue growth, but certain sectors of the business continue to present value opportunities despite the overall slowdown.

1. Oil to Chemicals (O2C) Business

  • Revenue: ₹1,55,580 crore (up 5.1% YoY)
  • EBITDA: ₹12,413 crore (down 23.7% YoY)

The oil to chemicals segment remains a core revenue driver for RIL, contributing significantly to the topline. While margins took a hit due to a sharp decline in transportation fuel cracks and downstream chemical deltas, this could present a value pick for long-term investors considering potential recovery in global demand.

  • Opportunities for Value: Increased volumes and domestic placements suggest potential resilience and recovery when global market conditions improve.

2. Digital Services (Jio Platforms)

  • Revenue: ₹31,709 crore (up 18% YoY)
  • EBITDA: ₹15,931 crore (up 23.4% YoY)

The digital services sector, through Jio Platforms, continues its strong growth trajectory. Jio’s significant subscriber base and the rollout of new services such as Jio AirFiber and AI-Cloud underline the robust potential for further revenue growth.

  • Opportunities for Value: The digital services business is rapidly expanding, driven by tariff hikes, subscriber growth in 5G networks, and new offerings like AI-Cloud. As a high-margin segment, it provides an attractive opportunity for long-term investors.

3. Retail Segment

  • Revenue: ₹66,502 crore (down 3.5% YoY)
  • EBITDA: ₹5,675 crore (up 1% YoY)

Although revenue from the retail business dipped slightly, the EBITDA growth and improvement in margins indicate effective cost management and operational streamlining. The company’s expanding store network and partnerships (e.g., Delta Galil) offer value potential in the fashion and lifestyle categories.

  • Opportunities for Value: With 464 new stores and a growing customer base, Reliance Retail is well-positioned for recovery in consumer demand, especially as the macroeconomic environment stabilizes.

4. New Energy Initiatives

Reliance’s new energy giga-factories are on track to commence production of solar PV modules by the end of the year. This venture could be a future game-changer for the company, contributing to long-term sustainability and diversification away from oil dependence.

  • Opportunities for Value: The solar PV module production is part of Reliance’s broader strategy to pivot towards cleaner energy, which may unlock substantial long-term value for investors seeking exposure to renewable energy.

5. Oil & Gas Segment

  • Revenue: ₹6,222 crore (down 6% YoY)
  • EBITDA: ₹5,290 crore (up 11% YoY)

Despite lower price realization, the Oil & Gas segment saw a strong EBITDA growth, mainly due to increased production from its KG D6 and CBM fields.

  • Opportunities for Value: The ongoing increase in production and a favorable ceiling price for KG D6 gas offer solid growth prospects for this segment.

Conclusion

Reliance Industries presents multiple value opportunities across its diverse business verticals. Investors could consider Digital Services for high growth potential, Retail for recovery prospects, New Energy for long-term sustainability, and Oil to Chemicals for cyclical recovery. As Reliance navigates the evolving business landscape, these segments provide a balanced mix of immediate and long-term value drivers.

This article aims to guide investors on where they may find value within Reliance’s diversified portfolio, based on its Q2 FY25 performance.

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Thanks for the nice summary. Why is this net profit unlike others which is EBITDA?

Is EBITDA really 85% of revenue? Or is it a mistake?

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details are updated now you can check it

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What about this details, is this updated?

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Yes it is the correct data

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The entry of Starlink and other satellite broadband providers like Amazon’s Project Kuiper into India, with the support of the government for administrative spectrum allocation, poses notable risks to Jio’s business in several ways:

Key Risks to Jio’s Business from Starlink’s Entry

  1. Competitive Pricing Pressure:
  • Starlink’s model of administrative allocation, which avoids auction-based spectrum costs, enables it to potentially offer services at more competitive rates than Jio and Airtel. Jio, which has invested heavily in terrestrial infrastructure and spectrum auctions, may find it challenging to match this pricing flexibility without incurring additional financial strain.
  • By bypassing auction costs, Starlink and similar players can focus more resources on scaling services rather than recovering spectrum expenses, giving them a potential cost advantage.
  1. Market Shift in Rural and Remote Areas:
  • Satellite broadband is especially beneficial in remote, rural, and underserved regions where laying terrestrial infrastructure is costly and challenging. While Jio has made strides in rural connectivity, satellite broadband could capture market share in these hard-to-reach areas by providing high-speed internet without extensive physical infrastructure.
  • If Starlink can deliver internet at a quality and price accessible to these communities, it could rapidly become the preferred option, reducing Jio’s expansion opportunities in rural markets.
  1. Diversion of High-End Users:
  • Starlink offers high-speed internet with lower latency than many terrestrial broadband options, attracting tech-savvy, high-spending customers who prioritize performance. If Starlink’s services are priced competitively in India, Jio could see some high-end or corporate customers shift to satellite broadband for more reliable speeds and connectivity, particularly in regions prone to infrastructure-related service interruptions.
  1. Potential Regulatory and Policy Adjustments:
  • The new Telecom Act of 2023, which allows administrative spectrum allocation for satellite providers, introduces an advantage for Starlink that Jio and Airtel currently lack. If regulatory support for satellite broadband continues to grow, terrestrial providers may face increased regulatory and policy hurdles as the government seeks to balance growth across both sectors.
  1. Strategic Dependency on Satellite Partnerships:
  • Bharti Airtel has already partnered with OneWeb (a satellite internet provider), suggesting that major telecom players may increasingly rely on satellite technology to supplement their offerings. Jio may need to consider partnerships or significant investments in satellite broadband to stay competitive, potentially diverting resources from its core terrestrial focus.

Starlink’s Potential Pricing and Accessibility in India

  1. Estimated Cost Structure in India:
  • Based on global trends, Starlink’s pricing in India could involve a one-time equipment cost (likely around ₹30,000–₹40,000, or $360–$480) and a monthly subscription fee potentially ranging between ₹2,000–₹3,000 ($24–$36).
  • While these costs may be manageable for urban or corporate users, they would be expensive for many in rural or low-income areas. Jio’s more affordable, wide-reaching plans may remain preferable for the average consumer due to the lower cost of terrestrial options.
  1. Affordability for Common Consumers:
  • The monthly cost of Starlink, although potentially lower in India than in the U.S., could still be prohibitively high for much of the population. Jio’s existing user base, particularly in urban and semi-urban regions, may remain loyal if Jio maintains cost-effective plans that meet everyday data needs.
  • Starlink may attract a niche audience willing to pay for premium, high-speed service, but widespread adoption among average consumers may be limited due to affordability issues.

Will Satellite Broadband Compete Directly with Terrestrial Broadband?

  1. Complementary Rather Than Direct Competition:
  • Satellite broadband is likely to be more complementary to terrestrial networks than directly competitive. Satellite is ideal for areas where laying physical cables and towers is impractical or too costly, while terrestrial broadband remains more cost-effective and efficient in densely populated areas.
  1. Niche vs. Mass Market:
  • While satellite broadband is capable of offering high-speed internet, its initial user base will likely consist of consumers in remote or underserved areas or those who prioritize high-quality connectivity regardless of cost. For urban and suburban regions with well-developed terrestrial broadband, satellite may be used as a backup or specialized service rather than a primary internet source.
  1. Corporate and Government Applications:
  • Industries requiring reliable connectivity across large or remote sites, such as oil and gas, mining, agriculture, and defense, may favor satellite broadband. Similarly, government programs for rural digital inclusion may increasingly support satellite broadband adoption, especially where terrestrial options are less feasible.

At the same time, one must remember that Starlink’s Adoption has been slower globally, especially in Africa. Why is it so?

  1. High Cost of Equipment and Service:
  • Starlink requires customers to buy a satellite dish kit, which is expensive upfront (often costing between $400 to $600) and has monthly service fees of around $110 in many countries. This cost structure is high for many consumers, particularly in lower-income regions like Africa, where average monthly incomes are often below the subscription costs.
  1. Regulatory Challenges:
  • In various regions, including parts of Africa, Starlink has faced regulatory and licensing hurdles. Additionally, some governments are cautious about allowing satellite providers, particularly foreign ones, due to data security concerns or conflicts with domestic internet policies.
  1. Supply Chain and Scaling Limitations:
  • The production and distribution of satellite equipment have been slower than anticipated due to supply chain disruptions and the logistical challenges of reaching remote areas. These hurdles have impeded Starlink’s scaling efforts, particularly in regions with limited distribution infrastructure.

Sources: In a win for Elon Musk, Scindia says no to spectrum auction pitch from Ambani, Mittal - The Hindu

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Reliance New Energy: A Giant in the Making

  • Transformative Milestone for RIL’s New Energy Business:
    • Phase I of solar module manufacturing to begin in 4QFY25, followed by cell manufacturing and Phase II of module manufacturing in the next two quarters.
    • RIL is set to achieve 20GW module manufacturing capacity by FY27, positioning it as a major player in India’s solar module market.
  • Economies of Scale & Market Dominance:
    • With 20GW capacity, RIL will dominate the solar module space, compared to India’s current total solar module manufacturing capacity of ~77GW.
    • Tata Power and Waaree have 4.9GW and 13.3GW capacities, respectively. RIL’s scale gives it a significant competitive edge.
  • Backward Integration for Long-Term Competitive Advantage:
    • RIL aims to integrate backward into cells, ingots, wafers, and glass manufacturing by FY27-28.
    • This strategy will drive cost leadership, strong market share, and resilience, especially if the government mandates further backward integration in future projects.
  • Profitability & Growth Prospects:
    • Near-term profit contribution from New Energy is expected to be minimal, as the output will primarily serve RIL’s own renewable energy needs (100GW target by 2030, including green hydrogen).
    • Long-term profitability expected after FY27, driven by scale, technological advancements, and cost advantages.
  • Standalone Operating Cash Flow to Fund New Energy:
    • RIL generates ~INR600-700b in operating cash flow from its O2C business, which will fund its New Energy investments.
    • Initial capex investments of USD3-4b have been made, with plans for increased investment as RIL expands into battery manufacturing, green hydrogen, and other renewable energy initiatives.

Source: Motilal Oswal report on 06.12.2024

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Dec 2024 quarterly results are here https://www.bseindia.com/xml-data/corpfiling/AttachLive/cb5da39b-b46a-45f7-b2b6-932a4f2ecf91.pdf
would like to hear your views, seems pretty solid to me

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Would like to know if reliance jio is going with the IPO route, will reliance investors get any shares of jio? According to this article it will be a combination of both fresh issue and OFS, with a pre-IPO placement for a closed group of investors. If the investors won’t get any shares of jio does holding reliance even make sense? considering jio is reliance’s one of the main high revenue earning and future potential business. Would just like to get your thoughts…

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Jio is a private subsidiary of Reliance Industries.

After IPO, it will still be a subsidiary of Reliance Industries but a public one and the shareholding of the parent (Reliance Industries) will be diluted down.

The fresh issue portion will go on the balance sheet of Jio and the OFS portion will go on the balance sheet of Reliance Industries.

Theoretically, the market value of Reliance Industries pre-Jio and post-Jio lisiting should be exactly the same

But the market is the market and it may value Reliance Industries more post-Jio listing if it feels like the cash raised by Jio and Reliance Industries will be effectively used and less if it feels like it won’t.

And of course, lots of other moving parts are there in the market valuation of Reliance Industries (O2C, Retail etc).

Hope it helps :slight_smile:

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If this analysis is correct (and I think most probably it is), then Reliance is going to disappoint shareholders big time. I am holding Reliance for past 10 yrs, now I think it was a big mistake. Although, I would wait some more time till I get more clarity here.

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Long read about a recent SEBI order on a pump-and-dump recently with Reliance in the midst

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I’ve always thought it funny that a company can generate infinite shares, almost like an infinite money glitch. Generate infinite shares, sell for infinite money.

If a company sells a billion shares, it’s just splitting the same limited pie into a billion pieces. The total size of the pie remains the same. So of course there isn’t going to be any infinite money.

But because of this infinite shares creation ability, companies can shrink the size of the piece of the pie with any particular shareholder. If I own 10 shares of a company with 100 shares, and the company magically creates another 900 shares and sells them to its favourite people, those people now have 900 while I’m stuck with the same 10.

There are safeguards against this kind of stuff and it’s not something that usually happens. I probably wouldn’t be writing about it if it did usually happen. Late in December, SEBI issued an order against Bharat Global Developers, a 30-year old company whose only reason for existence was its capacity to defraud individual investors.

Bharat Global ran a classic pump-and-dump, and the first thing you do to run a pump-and-dump is hoard up on the shares of the company you’re pumping. From SEBI’s order:

[…] the Company made two preferential allotment of shares – 9.72 crore shares in April 2024 to 31 allottees and 35 lakh shares in August 2024 to 10 allottees. These large preferential allotments resulted in 99.5% of the shareholding being concentrated in the hands of these 41 allottees…

Bharat Global sold more than 10 crore (100 million) shares to 41 of its favourite people. These 10 crore shares were the entire company! 99.5% of it at least. 99.5% is quite a sweet spot if you’re looking to do a pump-and-dump.

The pump and the dump

We’ve spoken about the general mechanics of a pump-and-dump before . It’s reasonably straightforward:

  1. Find a relatively unknown company. Buy as many of its shares as you can.
  2. Scream your lungs out! The nicer the story about the company, the better.
  3. People thinking they’re great stock pickers will buy the shares of the company. This is a dumb illiquid stock, so its price will shoot up.
  4. Sell to the suckers.
  5. ??? Profit.

Bharat Global sold the bulk of its shares in April 2024, first starting with 31 people. This was a ₹97 crore sale. In August 2024, it sold another batch of shares to 10 more people for ₹73 crore.

When a company sells its shares in a “preferential allotment” or in better words, to people that it chooses to, those people cannot sell their shares to the public right away. They’re locked in for 6 months to ensure that the company isn’t just distributing free money, and so that public investors have some time to evaluate and react to the company’s actions.

The 31 people who bought Bharat Global’s shares in April couldn’t sell until at least October. As soon as October hit, the company started screaming its lungs out with announcements. Here’s a slice of the kind of disclosures it made:

  1. ₹300 crore order! For potatoes! From McCain India Agro Pvt Ltd. Yeah, the frozen fries company.
  2. ₹650 crore order! From Tata Agro & Consumer Products. For tea leaves and dry fruits.
  3. ₹156 crore order! From UPL Agro—groundnuts to extract oil from!
  4. A ₹120 crore order from Reliance Industries Ltd! For designing, engineering and constructing a refinery component.

I’m sure I don’t need to say it, but all these orders were fake. SEBI went to each company and asked them about the orders. The companies from the disclosures don’t even exist! Bharat Global just added a random “Agro” at the end of a bunch of popular companies’ names to make their fake orders sound fancy.

Between 30th October and 11th December, 13 of Bharat Global’s favourite 41 who were now out of the lock in, sold their shares. They made a massive ₹272 crore ($31 million) in profit. Here’s an example of the scale of the profit:

One of the preferential allottees, namely Mahadev Manubhai Makvana who was allotted 37,82,000 shares in the first allotment, is also the Authorised Signatory in respect of two bank accounts of BGDL with Yes Bank and Axis Bank. The account opening date for Yes Bank was March 20, 2024. He offloaded 4,97,359 BGDL shares for INR 70,71,94,153 between November 01, 2024 and December 20, 2024, making a profit of approximately INR 70,22,20,563 against an investment of approximately INR 49,73,590.

Mahadev Manubhai Makvana (MMM?) invested ₹49 lakh ($57k) and made ₹70 crore ($8M). 155 times the initial investment! Uff.

SEBI also discovered that MMM was Bharat Global. His name was on one of the company’s bank accounts! If you’re running a pump-and-dump, maybe don’t put your name on the bank account of the company you’re pumping.

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And then there was Reliance

Of the four fake disclosures I highlighted, one is not the same as the others. When SEBI wrote to Reliance to figure out if they had indeed placed a ₹120 crore order with Bharat Global, here’s what it got:

RIL submitted vide e-mail dated December 19, 2024 that BGDL had not supplied any material for the FCC project of RIL’s refinery. RIL further submitted that BGDL (formerly known as Kkrrafton Developers Limited) had supplied only general construction materials to RIL for about INR 155 crore (including taxes) during the period from April 01, 2024 to September 30, 2024 which was not related to the FCC project.

Bharat Global’s announcement about a ₹120 crore order was false, no surprises there, but Reliance told SEBI that there was another ₹155 crore order which was apparently legitimate and fulfilled?!

Bizarre. Very bizarre. Bharat Global was a company whose revenue was literally 0 for many years before it turned into a money grabbing vehicle. It lied about having subsidiaries which did not exist. The company changed its name 4 times in its lifetime. (Probably picked the name “Bharat Global” because of how patriotic the pumpers-and-dumpers were.)

There was no business! There was never a business! All its disclosures were fake. And yet, somehow, out of nowhere, not only did it have a real ₹155 crore order from Reliance, but it also chose to make up a fake order when it could very well have just disclosed the real one instead?

I think this takes the cake for anything I’ve written until now. And I’ve written about some weird stuff . I really don’t know what’s happening. SEBI needs to jump on this thread and find some answers. But hey, until then, maybe I can guess?

Here’s some stuff about Reliance’s payments from SEBI’s order:

… data submitted by RIL shows that a payment of INR 57.22 crore was made to Kkrrafton Developers Limited on March 16, 2024, another 8.07 crore on March 19, 2024 and a last payment of INR 28.04 crore on August 12, 2024.

and,

[…] In this regard, from the bank statements of BGDL obtained from Indian Bank, it was observed that RIL made advance payments of Rs. 65.29 crore to BGDL in March 2024.

Reliance paid Bharat Global ₹65 crore in advance and before it even raised an invoice for that money! In all, Reliance paid the company at ₹93 crore, with the last payment in August. Now come on, Reliance is known to be pretty cut-throat, always getting the better half of a deal. Paying a zero-revenue company ₹65 crore before it’s even asked to doesn’t sound like it.

Let’s put these events down in chronological order:

  1. In March 2024, Reliance paid Bharat Global ₹65 crore out of the goodness of its heart.
  2. The next month in April, Bharat Global allotted shares worth ₹97 crore to its favourite people.
  3. In August, Reliance paid another ₹28 crore.
  4. Later in the same month, Bharat Global allotted another ₹73 crore worth of shares to its favourite people.
  5. The money that Reliance paid Bharat Global did not show up in Bharat Global’s financial statements.

Is there a connection between the money Reliance paid Bharat Global and the money that Bharat Global’s favourite people paid it? I don’t know. Were those people really using Reliance’s money to run a pump-and-dump? I have absolutely no idea. [1]

Playing saviour

The people that bought Bharat Global’s shares in its second sale in August were to be locked in until February 2025. By late December, just before SEBI stepped in, Bharat Global’s pumped-up price was at ₹1300—6X the price that the August buyers got the shares at.

This post would’ve probably been a two-part pump-and-dump series, had SEBI not identified the first pump-and-dump in time. For now, the 13 folks that made the ₹272 crore profit will have to give the money back. And the others that couldn’t sell Bharat Global’s shares in time will be stuck holding the bag. [2]

Footnotes

[1] I really mean this! There are a lot of unknowns.

[2] In the process of writing this I discovered that some of the 41 people are very obviously involved in other pump-and-dumps as well. Attempts at them, at least, if not successful ones. I’ll probably write about it in a future MYSTERY POST.

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