Shares of Reliance Industries (RELI.NS), India’s largest company by market capitalization, experienced a significant setback on Monday as the conglomerate reported a larger-than-expected drop in profit, leading to a nearly 3% decline. This comes on the back of a 3.1% slide in the stock on Friday, just before the release of the financial results. Earlier this month, the stock had rallied over 13%, reaching a record high before the demerger of Jio Financial Services last Thursday. The recent stock performance has raised concerns about the company’s flagship oil-to-chemicals (O2C) business, which had experienced record-high refining margins last year due to the surge in fuel demand following the post-pandemic recovery.
Focus on Reliance’s Oil-to-Chemicals Business Amid Profitability Concerns
The earnings before interest, taxes, depreciation, and amortization (EBITDA) of the O2C business fell 6% in the latest quarter, exerting downward pressure on the overall profit. Despite diversifying into retail, green energy, and telecommunications, the O2C business remains the largest contributor to Reliance’s operational revenue, accounting for over 63% of the company’s income. Analysts at Jefferies predict that the unit’s profitability in the current quarter will continue to be challenged due to the limited impact of the EU ban on imports of Russian refined products, weak economic activity in China, and a narrowing discount on Russian crude.
Reliance Jio and Retail Unit Underperform Expectations
The telecoms and retail units of Reliance Industries also faced challenges, failing to meet expectations. Reliance Jio, the telecoms unit, recorded its slowest profit growth in six quarters, primarily due to higher expenses and a slowdown in tariff hikes. Meanwhile, the retail division’s revenue did not rise as much as anticipated, despite significant store additions and acquisitions of brands and businesses, including German retailer Metro AG’s (B4B.DE) Indian unit, dampening investor sentiment.
Analysts Maintain “Buy” Rating, but Lower Price Target
Despite the recent setbacks, the average rating of the 32 analysts covering Reliance’s stock remains a “buy.” However, the median price target, according to Refinitiv data, stands at 2,840.50 rupees, implying a roughly 13% increase from the current price of 2,504.95 rupees. This projection is 8% higher than the stock’s previous record high of 2,630.95 rupees.
Conclusion: Mixed Sentiments Surround Reliance Industries
Reliance Industries’ recent performance has been a mixed bag, with the company facing challenges in its key businesses, particularly the O2C unit, as well as the telecoms and retail divisions. The drop in profits and concerns over future profitability have impacted investor confidence, leading to a decline in the company’s share price. However, analysts remain cautiously optimistic about the stock, maintaining a “buy” rating, and foreseeing a potential rebound with a higher price target. As the company navigates through the economic landscape and adapts to changing market dynamics, investors will be closely watching its strategic moves and financial results in the coming quarters.
