Is Reliance Industries No Longer A Reliable Bet?

In recent months, the Indian equity market has experienced a significant downturn, with its market capitalisation declining from approximately ₹472 lakh crore at its peak to the current ₹396 lakh crore. Of the ₹75 lakh crore decrease observed, Reliance Industries Limited (RIL)—India’s largest company by market capitalisation—has played a significant role. RIL’s market capitalisation has fallen by ₹5.5 lakh crore from its peak, accounting for roughly 7 per cent of the overall erosion in the market capitalisation of Indian listed companies. 

Reliance Industries has long been a dominant force in the Indian stock market, renowned for delivering robust returns to its shareholders. However, 2024 marked the first calendar year in the past decade during which RIL shares recorded a negative return. Since the beginning of 2021, Nifty 50 has delivered returns of 60.82 per cent, whereas Reliance Industries’ share price has risen by 33.80 per cent, indicating a massive underperformance of 27.02 per cent compared to the NSE flagship index. 

Reliance Industries has long been a dominant force in the Indian stock market, renowned for delivering robust returns to its shareholders. However, 2024 marked the first calendar year in the past decade during which RIL shares recorded a negative return. Since the beginning of 2021, Nifty 50 has delivered returns of 60.82 per cent, whereas Reliance Industries’ share price has risen by 33.80 per cent, indicating a massive underperformance of 27.02 per cent compared to the NSE flagship index. The article examines the reasons for the downward spiral and whether the slide will continue 

The graph also reflects a decline in returns over the past five years. In this story, we will explore the reasons behind Reliance Industries’ underperformance. Additionally, with the recent FII selloff and rising global uncertainties due to U.S. President Donald Trump’s policies, does it make for a good investment decision? 

Tracking RIL’s Stock Performance

It is clear from the graph that since the beginning of 2021, Reliance Industries has, for the majority of the period, been performing in line with the Nifty 50 index. However, since mid-July 2024, the stock has quite visibly underperformed the Nifty index, and from the end of September, when the FIIs’ exodus started, the divergence has been massive. So, what caused this underperformance? Did the company’s growth stagnate? Let’s look at the company’s financial performance during this period. Between FY21 and FY24, Reliance Jio, the company’s telecom arm, delivered a strong EBITDA CAGR of ~19 per cent. 

Similarly, its organised retail arm, Reliance Retail, recorded a CAGR of 38 per cent over the same period. Yet, the stock has underperformed the index. One might argue that while these segments performed well, the company’s overall EBITDA growth might have been weak. You would be completely mistaken if you think this way, as Reliance Industries’ consolidated EBITDA and PAT grew at a CAGR of ~26 per cent and ~14 per cent, respectively, during FY21–FY24. This is by no means a low growth rate—on the contrary, it is an impressive performance considering the company’s massive scale. 

Contrast in Financial and Stock Performance 

1. Rise in Capex with Negative Free Cash Flow Generation: RIL has experienced a period of significant capital expenditure (capex) and negative free cash flow (FCF) generation between FY21 and FY24, totalling ₹88,500 crore. As the capex run rate has surpassed revenue and profitability growth, the company relied on borrowings to fund the capex which has steadily increased over FY21–24. However, the leverage remained well within the management’s guidance. The rise in debt and capex can be primarily attributed to substantial investments in its retail and digital services (Reliance Jio) segments. 

2. Jio Expansion: RIL invested heavily in enhancing its telecom infrastructure, notably in 4G and 5G network rollouts, to aggressively increase market share. 

3. Retail Growth: The company rapidly expanded its retail presence, both physically and through omnichannel platforms like Jio Mart, increasing its square footage significantly. 

Expanding Working Capital

The net working capital (NWC) has been on a steady upward trajectory over the past four years due to a significant surge in inventory levels. The NWC has now reached a positive ₹28,600 crore by the end of FY24, largely driven by an increase in inventory. Expansion of retail operations might have led to a substantial build-up of inventory. While absolute levels of inventories can be misleading when the scale of operations is growing significantly, it is noteworthy that the average days of inventory have also increased to 126 days in FY24, compared to just 82 days in FY20 and an average of approximately 110 days during FY21–23. 

Return Ratios

The return on capital employed (ROCE) has remained at moderate levels over the last 4–5 years due to a significant increase in capital employed, which has continued to outpace earnings’ growth. The most substantial contraction in ROCE has been observed in the retail segment during FY20–24, while the returns from the upstream oil and gas segment have witnessed a sharp increase. 

Segment-Wise ROCE 

Should You Buy RIL Stock Now? Over the past five years, RIL’s strategic effort to build a diversified and robust business portfolio for earnings growth has yielded positive results, with further enhancements observed this year. The contribution of EBITDA from the previously dominant oil-to-chemicals (O2C) segment has declined by 21.96 percentage points and it came down from 58 per cent to 37 per cent between FY20 to FY24. Simultaneously, the combined share of retail, Jio and upstream segments has expanded by 22.22 per cent, reaching 59 per cent by the end of FY24, compared to 36 per cent in FY20. 

Segmental Revenue Mix 

Segmental EBITDA Contribution 

Let us now look at the quarterly highlights and future outlook of the company’s major segments: 

Oil-to-Chemicals (O2C)

RIL’s oil-to-chemicals (O2C) business, the company’s largest revenue generator, has faced a tough stretch over the past few quarters. A combination of muted global demand, sluggish Chinese consumption, geopolitical tensions, and large capacity additions weighed on its performance. However, in Q3FY25, the segment showed signs of revival, supported by stronger refining margins and higher crude processing volumes. The company processed a record-high of 17.9 million metric tonnes (MMT) of crude. 

This marked a 9.1 per cent YoY increase, driven by robust domestic demand. India’s transportation fuel demand surged 17 per cent YoY, reflecting rising economic activity. Despite this, the margins remained under pressure, with EBITDA per tonne falling 7.5 per cent YoY to USD 95, mainly due to weak petrochemical and polyester margins. However, a 14 per cent sequential improvement in margins was seen, led by stronger refining cracks in gasoil and jet fuel. In FY22, the O2C segment thrived on post-pandemic economic recovery and refinery shutdowns. 

FY23 saw EBITDA growth fuelled by energy market disruptions and windfall taxes, while FY24 benefited from high fuel cracks but struggled with weak chemical deltas. In FY25, geopolitical uncertainties, elections and increased supply posed challenges, 

but with demand rebounding, the worst may now be behind. RIL continues to invest in modernising its O2C operations, with a portion of capital expenditure shifting toward sustainability initiatives such as carbon capture and hydrogen production, positioning the company for a lower-carbon future. 

Financial Highlights - The company’s EBITDA increased by 2.4 per cent YoY and 16 per cent QoQ, while the EBITDA grew 13 per cent QoQ, driven by improved volumes, better gasoil and ATF cracks, increased domestic product placement, and optimised ethane feedstock cracking. However, on a YoY basis, the EBITDA weakened due to softer refining and petrochemical margins, despite a 9 per cent YoY rise in production. RIL remains optimistic about the refining demand, expecting strong momentum during Chinese New Year, Ramadan, and winter months in the Northern Hemisphere. 

Jio, India’s leading telecom operator and the world’s largest standalone 5G network outside China, continues to expand its market dominance. The company now boasts a 17 crore 5G subscriber base, with 5G accounting for ~40 per cent of the total wireless traffic. Notably, Jio attracts ~70 per cent of the incremental 5G devices sold in India. The recent tariff hikes introduced in July 2024 have started reflecting in its financial performance. The average revenue per user (ARPU) has now increased for two consecutive quarters after a prolonged flat phase. However, these price hikes led to a temporary churn, with over 1 crore subscribers leaving in the last quarter, many shifting to competitors like BSNL. 

However, the good news is that the subscriber base has stabilised with 33 lakh net additions in Q3FY25, indicating the end of the SIM consolidation phase caused by price-sensitive users dropping extra connections. Starlink’s anticipated entry into India could pose a competitive threat if it introduces aggressive pricing. Currently, fixed broadband plans from Jio and Airtel are priced at USD 10-13 per month, nearly one-fourth of Starlink’s global average pricing of USD 40-50 per month. Moreover, Indian providers offer free hardware and zero installation charges, making them a cost-effective choice for consumers. 

Financial Highlights - The company’s revenue grew 16 per cent YoY and 3 per cent QoQ to ₹29,300 crore, driven by a 4 per cent QoQ increase in ARPU. Blended ARPU rose 4 per cent QoQ and 12 per cent YoY to ₹203 per month, benefiting from the residual impact of the tariff hikes. Net subscriber additions stood at 3.3 million in Q3FY25, bringing the total subscriber base to 482.1 million. Further tariff hikes, potentially around 15 per cent (~`50 per month on base packs), are expected by December 2025. Jio is projected to be the primary EBITDA growth driver from FY24 to FY27, leveraging market share expansion in wireless, higher ARPU, and growth in the homes and enterprise businesses. While capital expenditure remains high, it is expected to taper off as Jio completes its 5G and fibre optic (FTTH) rollouts. 

Reliance Retail rebounded strongly in Q3FY25 after experiencing sluggish growth in the prior quarters. The segment recorded 8.8 per cent YoY revenue growth, reaching ₹90,333 crore, primarily driven by operational efficiency improvements and strategic store rationalisation. By focusing on optimising store layouts, enhancing productivity, and shutting down underperforming stores, the company has improved its overall profitability. Store expansion continued, with 779 new stores opened, bringing the total store count to 19,102. However, the overall retail area has been on a declining trend since the beginning of FY25. One standout performer within RIL’s retail portfolio is Campa Cola, which has swiftly captured over 10 per cent of the sparkling beverage market in select states. 

Acquired in 2022 for just ₹22 crore, the brand is on track to exceed ₹1,000 crore in revenue by FY25. Reliance Retail has launched express deliveries across 4,000 pin codes, while deliberately steering clear of the ‘quick commerce’ label. Acknowledging the growing competition in the space, Reliance Industries is following its own playbook in the segment by leveraging its existing store network and grocery stores’ partnerships to make faster deliveries. Reliance Retail is expected to see continued growth, with expansion into quick commerce, category diversification, and a stronger retail footprint driving momentum. 

Financial Highlights - The company’s revenue increased 7 per cent YoY, supported by operational improvements and a rise in customer engagement during the festive season. The EBITDA grew 9 per cent YoY to ₹6,600 crore, though the margins contracted slightly by 20 basis points QoQ to 8.3 per cent. Store rationalisation led to 623 store closures, yet net additions remained positive, with a total of 156 new stores. Footfalls across the retail formats surged to 296 million, up 5 per cent YoY, while transaction numbers rose 11 per cent YoY. Reliance Retail is expected to see a recovery in growth following store rationalisation and B2B restructuring, alongside an increased footprint and category expansion, with potential for entry into the quick commerce segment. 

RIL’s exploration and production business delivered stable results, continuing its steady performance. Production from the KG-D6 basin remained at 28 million standard cubic meters per day, with gas price realisation inching up to USD 9.74 per MMBTU, compared to USD 9.66 last year. Though this segment doesn’t contribute significantly to the overall revenue, it plays a crucial role in providing key raw materials like natural gas and crude oil for RIL’s downstream operations. The exploration and production margins remain sensitive to global crude and gas price fluctuations, which have been volatile. 

Nevertheless, the segment achieved 5 per cent QoQ growth in EBITDA, reaching ₹5,570 crore, although this was down 4 per cent YoY. KG-D6 production declined by 5.3 per cent YoY, and the lower price realisation for condensate and CBM gas further impacted the segment’s performance. Capital expenditure remains moderate, as the company prioritises stable production over aggressive expansion. Moving forward, investments in exploration and production could be scaled back further as RIL shifts focus to its new energy ventures. 

New Energy Business 

Reliance Industries is making bold strides in the new energy segment, with a vision to build it into a business as large as its oil-to-chemicals (O2C) division within the next 5-7 years. The company is venturing into solar, battery storage, and green hydrogen segments. 
 

RIL entered the new energy space in 2021 through its subsidiary Reliance New Energy Limited (RNEL). In FY24, it invested ₹8,000 crore, with ₹6,900 crore allocated to Reliance New Solar Energy (RNESL), with the first phase of solar module production set to begin in Q4FY25, soon followed by cell manufacturing and the second phase of module production. The goal is to achieve 20GW solar module capacity by FY27, making Reliance Industries one of the largest players in the industry. RIL isn’t just building modules but aims to integrate backward into cell, ingot, wafer and glass manufacturing by FY27-28. This strategy, which requires significant capital and technical expertise, is something only a few global manufacturers have successfully executed. Over time, this integration will give RIL a cost advantage and help capture market share. 

Funding New Energy Through O2C Cash Flows

RIL initially planned a USD 10 billion investment in its new energy business over three years, but capex spending has been slower than expected (USD 3-4 billion spent so far). However, with a strong standalone operating cash flow of ₹60,000-70,000 crore and low O2C capex requirements (₹15,000-20,000 crore), RIL can self-fund its ‘new energy’ ambitions. While near-term profits from new energy will be minimal as much of the output will be used for captive consumption, RIL is setting up 100GW of renewable capacity by 2030, including green hydrogen needs. By FY27, as scale, cost efficiency and technology advances take effect, new energy could emerge as Reliance Industries’ next big profit driver. 

Key Upside Risks 

1. Tightening global refining and chemical markets.
2. Stronger ARPU growth in Jio with rising market share and reduced competition.
3. Successful partnerships and accelerated execution in new energy ventures. |
4. Lower capital expenditure. 

Key Downside Risks 

1. Ever since the FII selling exodus began, Reliance stock has faced a severe impact. This is clearly reflected in the FIIs' stake in the company, which has declined from 24.2 per cent in Q4 FY22 to 19.2 per cent in Q3 FY25. If FIIs continue their selling spree, Reliance stock may remain under pressure, as it provides FIIs with liquidity, allowing them to sell without significant impact costs.
2. Weaker O2C margins.
3. Slower retail growth.
4. Delays in new energy business execution.
5. Bans on single-use plastic impacting margins.
6. Delays in monetising energy and telecom assets.
7. Churn due to increased tariffs
8. Increased competition from entrants like Starlink. 

Conclusion

The peak of the capex cycle for Reliance Industries may be behind. Reduced capex in Reliance Jio may be offset by increased investments in new energy initiatives. New energy forays have shorter gestation periods (6-12 months) compared to telecom and oil-to-chemicals segments. With a closing price of ₹1,204 on February 25, 2025, Reliance Industries is valued at an EV/ EBITDA multiple of 10.4 times, lower than its 10-year median of 11.8 times. Therefore, investors seeking to invest in Large-Cap stocks may consider purchasing RIL as the current valuations offer a favourable risk-reward ratio.