After delivering one of its best quarterly revenue and EBITDA performances in Q1FY23 on Friday, investors hoped Reliance Industries’ stock would have a positive start this week. But as they say in stock market parlance—' it’s all priced in’. RIL’s stock was down 3.5% on Monday while the Nifty 50 was down less than 1%.

Investors were probably feeling the Monday blues because Reliance Industries missed Trendlyne Forecaster’s average of consensus estimates for both consolidated revenue (by 6.5%) and net profit (by 21.7%). Expectations had been high for Q1 results, with analysts had been counting on high crude oil prices and surging demand for transportation fuel and petrochemicals to boost RIL’s performance.

Still, the consensus call among analysts post results is a ‘Buy’ on RIL. Last week, the Centre rolled back an export tax on fuel sold from special economic zones (or export-oriented enclaves) from July 1 after crude prices sharply corrected. This should bode well for the company going forward.

Does that mean the street is being too pessimistic on RIL with the drop in share price? Well, maybe not.

All businesses are firing together, but a global recession looms

Even though RIL has built out various consumer-facing businesses, it’s the oil-to-chemicals (or O2C) powerhouse that is still its beating heart. The company’s management said the 46.3% YoY growth in its consolidated net profit in Q1FY23 (to Rs 17,955 crore) was due to the O2C business performing well. Still, RIL wasn’t able to beat its Q3FY22 consolidated net profit.

That’s not the only part that might concern investors. If we look at the O2C business’ throughput (quantity of products manufactured) in Q1FY23, it was only marginally higher on a YoY basis at 19.8 million metric tonnes or MMT (vs 19.3 MMT in Q4FY22 and 19.0 MMT in Q1FY22). This includes the throughput from its refinery as well.

If we juxtapose the Rs 1,61,715 crore revenue number from the O2C business in Q1FY23 with the throughput during the period, it’s clear that it was higher prices for products that helped it post record revenues. Still, demand was firm during Q1FY23 for the O2C business as travel surged internationally.

The company said “higher associated costs” led to diminishing benefits from the purchase of discounted crude oil available in the international market. Additionally, higher logistics and energy costs pushed up operating costs for the O2C business.

Record EBITDA as all businesses perform without Covid-19 disruption

RIL’s consolidated EBITDA was at a record level of Rs 40,179 crore (vs Rs 33,968 crore in Q4FY22.) But higher depreciation and amortisation charges due to increased upstream production and higher capacity utilisation at Reliance Jio hurt lower profit at the consolidated level.

The rise in EBITDA at the consolidated level was helped by higher footfalls in the retail business. This led to better sales in fashion and lifestyle, grocery, consumer electronics, etc. Also, higher average revenue per user for Reliance Jio (at Rs 175.7), and higher realisation from KG-D6 gas output due to stable production also helped the company post a record consolidated EBITDA in Q1FY23.

Jio’s revenue rises after tariff hike led to subscriber churn in the past 2 quarters

After a few quarters of subscriber churn due to a tariff hike late last year, Reliance Jio’s subscriber churn fell in Q1FY23. The company added on a net basis nearly 9.7 million wireless subscribers, which helped it post a QoQ rise in subscribers.

Also, the rise in ARPU for a few quarters suggests that Reliance Jio’s subscriber base is learning to live with higher tariffs. This makes Reliance Jio’s underlying business a compelling story as there was a fear that higher tariffs would lead to a continued fall in subscriber additions. Thankfully for RIL’s investors, this didn’t pan out.

Additionally, the fibre-to-home (JioFiber) business is seeing increasing adoption with many new customers opting for post-paid plans due to the bundling of various entertainment packages with the Jio connection.

First quarter of zero Covid-related restrictions helps retail business shine

As malls, offices, and schools stayed open (without disruptions) in Q1FY23, RIL’s retail business saw footfalls rise. The footfalls in Q1 are at 119% of pre-pandemic levels. This helped the business post its highest-ever revenue in a quarter of Rs 58,569 crore. But it’s worth pointing out that this was just marginally higher than Q4FY22 (Rs 58,019 crore). The company’s management admitted that there is growing cautious sentiment, which is affecting discretionary spends.

New store additions also helped expand the reach of Reliance Retail. The growth in digital business (now 19% of retail revenues) helped post the record high quarterly revenue in Q1FY23. Higher contribution from fashion and lifestyle and consumer electronics also helped boost sales during the quarter. The company is trying to increase the contribution of non-food-related businesses.

Even after many things working in tandem for Reliance Industries in Q1FY23, there are dark clouds visible. Its joint chief financial officer flagged a global recession as a key risk. High inflation could dampen the mood of consumers, who could hold on tighter to their purse strings.

This is probably what led to the pessimism in the street, which in turn caused RIL’s stock price to fall on Monday. How these headwinds will affect the company’s Q2FY23 results will give investors a clue on the road ahead for the rest of FY23