RIL remains a laggard on bourses amid sharp six-month stock price sell-off

Analysts attribute the company's poor show in the bourses to its lack-lustre financial performance in recent quarters

Reliance Industries (RIL), India’s largest company by revenue and market capitalisation, is laggard on the bourses. The company’s stock price has underperformed the benchmark BSE Sensex both in the short-term as well as medium and longer-term basis.

 

RIL stock price is down 0.8 per cent since the end of December 2023 compared to 12.5 per cent rally in the BSE Sensex during the period.

 

Similarly, the company’s stock price is up 19.3 per cent cumulatively since the end of December 2021 against 39.5 per cent cumulative rise in the benchmark index in the period.

 

The underperformance of RIL is largely due to a sharp sell-off in stock price in the last six months. Its share price is down 18.3 per cent since the end June this year compared to 3 per cent rise in the benchmark index during the period. Prior to this sell-off, the stock either out-performed or kept pace with the benchmark index. (See the adjoining chart).

 

Analysts attribute the company’s poor show on the bourses to its lack-lustre financial performance in recent quarters.

 

The company’s consolidated net profit (adjusted for exceptional gains & losses) was down 4.8 per cent year-on-year (Y-o-Y) while its net sales were down 0.2 per cent Y-o-Y in Q2FY25.

 

With this, RIL adjusted net profit has declined on Y-o-Y basis in six out of last nine quarters beginning Q2FY23. Similarly, the company has either reported a Y-o-Y decline or low single digit growth in its consolidated net sales in the five out of last seven quarters. 

 

As a result, the company’s quarterly net profit flattened and moved in the narrow range in the last three years. In comparison, the company’s overall assets and liability continues to grow leading to a deterioration in its key financial ratios such as return on equity (RoE).

 

For example, the company reported adjusted net profit of Rs 15,563 crore in Q2FY25, up just 2 per cent from Rs 16,240 crore in Q3FY22. In the same period, its interest expenses are up 58 per cent cumulatively.

 

RIL’s return on equity moderated to 8.3 per cent in Q2FY25 from 9.3 per cent at the end of March 2023 (Q4FY24) and is up 170 basis points from record low of 6.6 per cent in Q2FY21.

 

The Sensex companies however reported a faster improvement in their RoE from their Covid lows. The index companies average RoE improved to 17.7 per cent in Q2FY25 from 14.2 per cent at the end of Q4FY23 earnings season and record low of 9.4 per cent at the end of Q2FY21 earnings season.

 

RIL’s return on equity moderated to 8.3 per cent in Q2FY25 from 9.3 per cent at the end of March 2023 (Q4FY24) and is up 170 basis points from record low of 6.6 per cent in Q2FY21.

 

The Sensex companies however reported a faster improvement in their RoE from their Covid lows. The index companies average RoE improved to 17.7 per cent in Q2FY25 from 14.2 per cent at the end of Q4FY23 earnings season and record low of 9.4 per cent at the end of Q2FY21 earnings season.

 

As a result, the RIL’s return on equity is now 940 basis lower than that of the Sensex, more than twice its 15-year average gap of 410 basis points. One basis point is one-hundredth of a per cent.

 

Return on equity is an efficiency parameter and a company with high RoE has the ability to grow their business faster without resorting to external debt or equity financing.

 

A combination of low RoE and poor earnings growth has raised concerns about RIL’s earnings trajectory in future.

 

Some analysts however expect a turnaround in RIL fortunes in forthcoming quarters.

 

“Company’s poor show in recent quarters is due its large capex in various new businesses such in recent years that are yet to reach their full potential. Once these new ventures mature and scale-up we expect a faster ramp-up in revenues and RoE,” says G Chokkalingam, founder & CEO Equinomics Research.

 

According to him, the recent correction in RIL share price and resulting decline in its valuation is a good buying opportunity for long-term investors.