Reliance slips into the red for the first time in a decade in annual return stakes

Reliance Industries, India's premier oil-to-chemicals (O2C) to retail conglomerate, has been a cornerstone of investor portfolios for over a decade thanks to its position as key index heavyweight, and also on account of its heft as the country’s biggest private sector company by revenues.

But for the first time in a decade, the diversified juggernaut has delivered negative returns for investors in a calendar year. RIL’s share price has fallen 6.27% in 2024 to ₹1,210.70 (as of December 30)—with just a day to go—after delivering 11.78% return in 2023. The last time the stock fell was in 2014, with the stock closing at ₹200, with a marginal fall of 0.45%.

As on October 29, foreign portfolio investors (FPIs) own 19.33% stake in the company, while mutual funds own 8.56% stake with SBI MF holding the biggest chunk at 2.61% followed by ICICI Prudential at 1.16%. Among FPIs, Singapore-owned GIC owns the biggest stake at 1.16%. “By virtue of its weightage, the stock’s performance will continue to weigh heavy on large cap funds. Unlike in PMS, a public fund manager cannot really ignore a stock such as RIL. Funds can be marginally over- or underweight the stock in their schemes but cannot ignore it,” says a fund manager on the condition of anonymity.

Incidentally, since 1995, there have been 11 years where the stock has fallen with the maximum seen in 2008 at over -57% and the least fall in 2014. Post the Ambani brothers' split in 2005, only in five calendar years has it fallen over the previous year. But the big difference this time around is that investors should not be complaining given that they have been beneficiaries of the listing of Jio Financial Services in August 2023 wherein shareholders of RIL got one share of Jio Financial Services (JFSL) for every one share of RIL. Besides, this October, RIL shareholders were also served a 1:1 bonus issue. While Jio Financial fell -6.41% in 2023 post its listing in August 2023 when it closed the year at ₹233, in the current year, it has fetched investors 30.51% return at its current price of ₹306.

The current underperformance is driven by several intertwined factors. The global economy has faced significant headwinds in 2024, including rising interest rates, geopolitical tensions, and a sluggish recovery from pandemic-era disruptions. Reliance’s O2C business, being highly sensitive to macroeconomic shifts, experienced compressed margins. “O2C business was impacted by unfavorable global demand-supply dynamics,” Mukesh D. Ambani, chairman and managing director, had mentioned during the Q2 result announcement. In the six months of the current fiscal, as per a company release, consolidated profit fell from ₹38,002 crore to ₹36,549 crore, even as consolidated revenue grew to ₹5.16 lakh crore.

While its foray into retail initially captured significant market share, the segment’s profitability plateaued in recent years. Increased competition from e-commerce giants and tightening consumer spending poses a challenge. The consolidated profit of Reliance Retail Ventures in H1 FY25 stood at ₹5,385 crore vs ₹5,236 crore in H1 FY24, even as revenue from operations increased by ₹1,666 crore over H1 FY24 to ₹1.32 lakh crore in H1 FY25.

Further, Reliance’s aggressive diversification into green energy, telecom, and digital services hold long-term promise, but near-term execution challenges have dented investor confidence. For a stock that delivered an average annual return of over 24% in the past nine years (2015-2023), the negative returns in 2024 could signify a pivotal moment. Investors accustomed to consistent gains now face an inflection point as questions loom about changing market dynamics and Reliance recalibrating its strategy.

However, in a recent report, foreign brokerage CLSA mentioned a potential upside of 72% (₹2,186) driven by possible value unlocking for both Jio and Retail, along with scale-up of new energy to the size of the O2C business. CLSA has pegged the conglomerate’s solar photovoltaic value at $30 billion, saying that the “market is ignoring a new energy business”.

Reliance Industries’ underperformance is a stark reminder of the cyclical nature of markets. Whether this marks the beginning of a prolonged downturn or a temporary blip in an otherwise stellar journey remains to be seen. CLSA, though, believes the valuation is offering an attractive entry point. On a TTM basis, the stock is trading at 24x PE and 10.76x EV/Ebitda.

Periodical unlocking of value of its value-creating businesses is only the way that RIL will get rerated, but till then it will have to endure the pain of a “holdco” discount.