The current poor performance is due to a combination of several factors. The global economy faces major headwinds in 2024, including rising interest rates, geopolitical tensions, and a slow recovery from pandemic-era disruptions. Reliance’s O2C business is highly sensitive to macroeconomic changes and has experienced margin compression. “The O2C business was impacted by unfavorable global demand and supply conditions,” Chairman and Managing Director Mukesh D. Ambani said during the second quarter earnings call. According to a company release, in the six months of the current fiscal, consolidated profit declined from Rs 38,002 crore to Rs 36,549 crore, even as consolidated revenue rose to Rs 5,160 crore.
Although the foray into retail initially gained significant market share, profitability in this sector has plateaued in recent years. Intensifying competition with major e-commerce companies and tight personal consumption are becoming issues. Reliance Retail Ventures’ consolidated profit for H1 FY25 was 523.6 billion rupees in 1H FY24, even as operating revenue increased by 166.6 billion rupees to 1.32 billion rupees in 1H FY24 compared to 1H FY24. 5,385 crore against Rs.
Moreover, while Reliance’s aggressive diversification into green energy, telecoms and digital services holds long-term promise, near-term execution challenges are undermining investor confidence. A negative return in 2024 could mark a watershed moment for a stock that has returned more than 24% annually over the past nine years (2015-2023). Investors used to consistent returns are now facing a tipping point as questions emerge about changing market dynamics and Reliance’s strategic realignment.
However, foreign brokerage firm CLSA in a recent report said that the potential of 72% (Rs 2,186) is due to the expansion of new energy in line with the scale of O2C business, as well as the potential to unlock value for both Jio and retail. He said there was an upside. CLSA estimated the value of the conglomerate’s solar power generation at $30 billion and said that “the market is ignoring new energy business.”
Reliance Industries’ poor performance is a stark reminder of the cyclical nature of the market. It remains to be seen whether this marks the beginning of a prolonged recession or a temporary dip in a promising path. However, CLSA believes this valuation provides an attractive entry point. On a TTM basis, the stock trades at a P/E of 24x and EV/EBITDA of 10.76x.
Regularly unlocking value in value-creating businesses is the only way RIL can improve its valuation, but until then it will have to endure the pain of ‘holdco’ discounts.
