The significant decrease in Reliance stock value over the last six months has raised concerns among investors and analysts alike. Various factors have contributed to this underperformance, prompting a closer examination of the underlying causes.
In 2020, Reliance Industries (RIL) achieved a remarkable feat of becoming debt-free. But the Mukesh Abani-led USD83 billion conglomerate’s debt burden has since gone up while the stock is underperforming.
The RIL stock has fallen a staggering 25% in the last six months, from INR1,610 per share in July 2024 to INR1,218 apiece now. The Nifty 50 has returned a negative 1.9% in the same period. Over the last one year, the stock has declined 5%, against the Nifty 50 which is up 10%. In fact, RIL shares have delivered negative returns over the past year.
One of the main reasons for the stock’s dismal performance is related to falling oil prices which directly impacts RIL’s refining business, the biggest revenue generator for the group.
In 2020, Reliance Industries (RIL) achieved the impressive milestone of becoming debt-free. However, the conglomerate, led by Mukesh Ambani and valued at USD 83 billion, has since seen an increase in its debt burden while its stock performance has been lackluster.
The RIL stock has experienced a significant decline of 25% over the past six months, dropping from INR 1,610 per share in July 2024 to INR 1,218 per share currently. This is in stark contrast to the Nifty 50, which has returned a negative 1.9% during the same period. Over the past year, RIL shares have fallen by 5%, while the Nifty 50 has seen a 10% increase. This negative trend in RIL’s stock performance has been a cause for concern.
One of the primary reasons for the stock’s poor performance is the impact of falling oil prices on RIL’s refining business, which is the group’s main revenue source. The company’s EBITDA margin decreased to 8% in Q2 FY25 from 11% in the previous fiscal quarter. Additionally, due to tariff increases, RIL’s flagship telecom business, Jio, lost approximately 11 million subscribers in the second quarter of FY25. Delays in setting up the largest solar giga factory have also affected the company’s performance in the renewable energy sector.
Despite these challenges, there have been some positive developments. The upstream EBITDA for Q2 FY25 increased by 10.6% to INR 5,290 crore, while Jio’s EBITDA rose by 14% to INR 16,100 crore during the same period. However, the company’s gross debt has increased by 14% to INR 336,300 crore, causing concern among investors.
Reliance has a history of successfully navigating difficult situations, but the current circumstances require a careful and stratergic approach. The company has been in tough situations before and Indian mutual funds that are net buyers of the stock feel that this could be a buying opportunity for long-term investors.
RIL’s Debt Position
Reliance Industries Limited (RIL) embarked on an impressive debt-reduction journey in 2020, achieving a net debt-free status. However, this accomplishment was short-lived as the company’s debt has since increased.
As of March 31, 2020, the group, with a diverse portfolio spanning oil, telecom, and retail, carried a net debt of INR 161,035 crore. However, in just 197 days, ending on November 5, 2020, RIL raised a substantial INR 260,024 crore through various strategic initiatives. While RIL’s debt decreased in 2021, it experienced subsequent increases in 2022, 2023, and 2024. This upward trend peaked in September 2024 when RIL’s total debt reached INR 357,530 crore.
This is not the first time the stock has faced such a downturn. For nearly a decade, from 2008 to 2017, the RIL stock remained within a narrow trading range of INR 150 to INR 250. It was not until mid-2017 that the stock finally broke free from this constraint.
However, the outperformance after the market crash of March 2020, which coincided with the company’s debt-free initiative, was short-lived. With the looming specter of rising debt once again, RIL shares have returned to underperforming, leading many analysts to predict a continuation of this trend.
Sandip Sabharwal, a veteran market expert, expressed his concerns, stating, “Rising debt has been my biggest concern for Reliance, which is why we never actually invested in Reliance for many years. They kept guiding for zero debt, but continued to add new businesses and invest more, resulting in no free cash flow.” Even over a five-year period, the stock has underperformed the Nifty 50, which has returned 13% annually compared with 10% of Nifty.
Impact of Declining Oil Prices on Reliance Industries Limited
The pressure from falling oil prices is not only affecting RIL’s debt position but is also dragging down the stock. The fortunes of RIL’s oil business are directly tied to international crude oil prices, with the oil-to-chemicals (O2C) business contributing 59% to its revenues. The sharp decline in Brent crude prices, dropping nearly 50% to around USD70 per barrel from the March 2022 peak of USD130 per barrel, has significantly impacted the profitability and margins of upstream companies like RIL.
During a recent analyst meet in late October 2024, Srikanth Venkatachari, Group CFO of Reliance Industries, acknowledged the adverse effects of the unfavorable demand-supply dynamics on the O2C business. He stated that O2C revenues have declined by 5.1%, while Ebitda has slumped by 23.7% due to substantial corrections in fuel cracks, including aviation turbine fuel (ATF), gasoline, and gas oil, all of which have decreased by approximately 50% year-over-year. Additionally, downstream petrochemical margins have also fallen ranging between 9% and 24%.
The declining oil prices have also led to a decrease in foreign institutional investors’ (FIIs) stake in RIL, contributing to the stock’s underperformance. FII holdings declined from 24.23% in March 2022 to 20.17% in October 2024. On the other hand, domestic institutional investors (DIIs) have increased their stake from 14.23% to 18.24% during the same period.
Reliance, once a dominant force in the Nifty 50 index, has lost its position as the top-weighted stock. The company’s weight in the index has decreased from 10.2% in January 2024 to 7.7% in December 2024. This decline is a stark contrast to the peak of 14.9% reached in September 2020 following Reliance’s debt-free announcement. In the years that followed, the weight fluctuated between 10.86% and 11.89%. Prior to the stock’s breakout from a decade-long consolidation in January 2017, its weight was only 5.48%, remaining below 4% during that period of underperformance.
Retail in Focus
RIL is one of the largest companies in the Indian markets. Despite its current underperformance, many value investors are looking at the sum of its parts. According to an Emkay research report, the sum of parts (SOP) indicates that retail and telecom make up 70% of RIL’s share price at INR3,335. Therefore, the primary focus for most investors remains on retail, valued at INR1,302, or 40% of the total SOP.
With the refining and petrochemical business facing challenges, value investors view this as a cyclical trend and believe that RIL is a solid stock to bet on consumption (retail) in India, which is expected to continue to rise. These investors are interested in the long-term potential of the stock price.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.