RIL: Growth baton to shift from O2C to new energy in FY28
Reliance Industries Ltd’s investors are in a dilemma after the September quarter (Q2FY27) results: should they celebrate the strong earnings of the oil-to-chemicals (O2C) segment or worry about the weak profitability of the retail business? This predicament assumes even more relevance as the O2C segment currently enjoys abnormal profit, raising doubts about its sustainability.
The Q2 refining margin in the two main transportation fuels – petrol and diesel – is at least twice the five-year average. In this backdrop, the O2C segment Ebitda per tonne (based on production meant for sale) soared 68% year-on-year and 28% quarter-on-quarter to ₹13,924. This mainly drove Reliance’s consolidated Ebitda growth of 23% year-on-year, surpassing most brokerages’ expectations, to ₹56,616 crore.
Global oil demand outlook is weak for 2026. A rebound is anticipated in 2027, but demand is still likely to be marginally lower than the 2025 level. Even if the geopolitical scenario improves, weak demand is not good news for margins. Also, O2C is usually assigned lower valuation multiples because of its commodity nature, so a few quarters of high profit do not lead to a re-rating.
In contrast, the retail business, which enjoys higher valuation multiples, saw a 10 basis points (bps) dip in Ebitda margin sequentially to 7.34% in Q2, while revenue was flat at ₹80,220 crore. The margin fall is a worry even if a year-on-year comparison is ignored due to the shift in festival season this year to Q3 from Q2 in FY26.
Retail margins
According to the management, the online retail margin is lower than offline retail, but the online return on capital employed is higher. So, as Reliance Retail expands its online presence, further margin pressure can be seen.
For perspective, Eternal’s quick commerce business Blinkit has a steady state margin target of 6%. Reliance Retail’s mix of offline and online means its margin could eventually settle at a slightly higher level than that of Blinkit.
Despite the disappointing retail business, Reliance’s overall growth trajectory should continue. O2C’s profitability is likely to stay strong in the near term, before the new energy segment takes over the growth baton in FY28. The management is confident that the second half of FY27 for O2C would be as good as the first half with annual Ebitda estimated at ₹80,000 crore.
Low global inventories of refined oil products should support margins. Also, recovery of output from refineries in West Asia is expected to be gradual. Petrochem, a part of O2C, benefits from using ethane as raw material versus naphtha. The ethane and naphtha cracking differential was up 2.3x from the 2025 average.
Jio Platforms’ average revenue per user grew 1% QoQ, while Ebitda increased by 5% to ₹21,879 crore. Investors who are more upbeat on Jio Platforms, primarily telecom, are better off betting on it directly now that it has listed separately.
Reliance’s 65% stake in Jio Platforms, adjusted for holding company discount of 25%, means Reliance’s investors can capture only 50% of the latter’s potential upside in market capitalization.
If Jio Platforms and Reliance Retail's value (after applying 25% and 20% holding company discount, respectively, based on Nuvama Institutional Equities estimates), is deducted from Reliance’s market capitalization, then O2C, exploration and production (E&P), new energy, FMCG and the media businesses have a net market capitalization of ₹5.5 trillion.
That does not look expensive as the oil-related businesses – O2C and E&P – alone had generated an Ebitda of almost ₹76,000 crore in FY25, the lowest in four years post-covid, i.e. the FY23-FY26 phase.