Why reliance industries stock delivered negative returns?

Reliance Industries Limited (RIL) is one of India’s largest and most diversified conglomerates, with a strong presence across multiple sectors, including petrochemicals, refining, telecommunications, retail, and digital services. Founded in 1966 by Dhirubhai Ambani and his brother, Reliance initially started as a small textile company and has since grown into a global business powerhouse. 

Today, RIL operates in over 50 countries and is considered a leader in India’s industrial sector. The company’s diversified portfolio includes its flagship refining and petrochemical business, which is among the largest in the world, and its retail business, which has become one of the largest in India. RIL also has a strong foothold in the telecommunications industry through its subsidiary, Jio.  

With a market capitalization consistently among the highest in India, RIL is a key player in shaping the Indian economy and has a significant impact on global markets. 

Business Overview: 

1. Retail:  

Reliance Retail, India’s largest retailer, operates an integrated network of stores and digital commerce platforms, catering to diverse consumer needs across electronics, fashion, grocery and connectivity consumption baskets. 

2. O2C:  

The Oil to Chemicals (O2C) business portfolio spans transportation fuels, polymers and elastomers, intermediates, and polyesters. The O2C business includes world-class assets comprising refineries and petrochemical units that are deeply and uniquely integrated across sites along with logistics and supply chain infrastructure. 

3. Oil & Gas E&P: 

A major player in India’s Exploration and Production sector, with an upstream portfolio that includes deep and ultra deepwater oil and gas fields, and coal bed methane blocks.  

4. Digital Services: 

India’s premier digital services provider, catering to over 480 million subscribers with the most extensive fixed-mobile converged platform, and digital solutions. 

Jio has completed its planned True5G rollout across India. It is also accelerating the transformation of fixed broadband infrastructure in the country with its JioFiber and JioAirFiber solutions. The ability to offer connectivity services across customer cohorts and device form factors will enable Jio to address the digital needs of every Indian citizen. 

5. Media & Entertainment:  

Reliance has taken big strides in scaling-up the media and entertainment vertical in the last year. From initiating the merger of TV18 and E18 (Moneycontrol) with Network18, to onboarding a strategic investor in Viacom18, to announcing partnership with Disney.  

6. New Energy:  Converting Photons to Green Electrons and further to Green Molecules leading to reduction of carbon footprint. 

Industry Overview: 

The Indian Retail industry has always been one of the most versatile and high growth industries in the country. A growing urban population, rising income level, connected rural consumers, and increased consumer expenditure, are all contributing factors. 

This industry contributed nearly 10% to the India’s GDP in 2023, and the share of employment is around 8% and market size is around $911 billion and i spoised to reaach $2000 billion by one more decade. 

Coming to the Oil Industry:  

In FY 2023-24, the transportation fuel sector faced challenges related to geopolitics, shifts towards energy transition, environmental issues and economic concerns. Global oil demand rose by 2.2 mb/d to 102.4 mb/d, while supply increased by 1.6 mb/d to 102.1 mb/d. OPEC effectively managed oil prices through quota restrictions. The Brent crude oil price averaged US$ 83/bbl amidst volatility. In FY 2023-24, global refinery crude throughput increased by 1.5 mb/d to reach 82.3 mb/d, despite volatility stemming from geopolitical tensions. Moreover, tanker markets rose due to longer ton-miles resulting from changes in trade patterns. 

Coming to the Renewable Energy:  

Indian renewable energy sector is the third-most attractive renewable energy market in the world (according to EY Renewable Energy Country Attractiveness Index). India targets to commit 50% of cumulative generation capacity from non-fossil-based energy sources by 2030 and reduce its emission intensity of GDP by 45% by 2030 vs the 2005 baseline.  

Coming to Telecom Industry:  

The mobile telecommunications industry being an integral part of the Indian economy has contributed significantly to the economic growth and the GDP of the country over the period of the last three decades.  

India is the second-largest wireless market in the world. Its total wireless subscriber base reached 1,165 million as of March 2024. It is important to note that the industry has added 21.6 million subscribers and witnessed a growth of approximately 2% during FY 2023–24. The overall tele-density increased from 82.5% in FY23 to 83.3% in FY24. However, it is still low at ~83% in comparison with other global markets. 

Strengths:  

1. Market Leadership:  

A global leader in Oil to Chemicals operations, delivering high-spec fuels and materials, focused on enhancing integration and producing premium chemicals and green materials. 

Reliance is a global powerhouse in refining and petrochemicals, holding the position as one of the world’s largest refiners. With its expansive refinery complex in Jamnagar, it handles an impressive refining capacity of over 1.24 million barrels per day. Their focus on high-value petrochemical products further strengthens its dominance in this space. 

Reliance Retail is India’s largest and fastest-growing retail chain, with a footprint spanning across grocery, fashion, electronics, and more. The company has built an unrivaled presence, with over 18,000 stores across the country and an expanding online marketplace, with more than 300 million registered customer base for its retail business. 

Reliance Retail is the largest grocery retailer in the country, operating a wide portfolio of formats, each offering a distinct value proposition. 

Reliance Jio is the undisputable leader with its leadership position in telecom industry and handling approximately 60% of India’s data traffic, with over 12 million subscribers for Jio Fiber across India. 

2. Strong profit: Reliance achieved a record-breaking net profit for the year FY 2023-24 stands at INR 79,020 crore. In FY 23 it stood at INR 73,670 crore and interestingly reliance has the huge market cap of more than 20 lakh crore, making it the first Indian company to cross the INR 20 lakh crore. 

3. Strong Expansion and investments: 

Reliance Industries Limited (RIL) is making significant strides in the renewable energy sector, aiming to transform India’s energy landscape and achieve net-zero carbon emissions by 2035. 

Key Initiatives: 

• Dhirubhai Ambani Green Energy Giga Complex: Located in Jamnagar, Gujarat, this 5,000-acre facility will house five giga factories dedicated to: 

Solar Photovoltaic (PV) Panels: Producing integrated solar PV modules to support RIL’s goal of establishing 100 GW of solar energy capacity by 2030.  

Energy Storage Systems: Developing advanced battery solutions, including lithium iron phosphate (LFP) and sodium-ion technologies, to ensure reliable energy supply.  

Electrolyzers: Manufacturing high efficiency electrolyzers for green hydrogen production, contributing to India’s target of 5 million metric tonnes of green hydrogen by 2030.  

Fuel Cells: Creating fuel cell systems to provide clean power for various applications, from transportation to data centers.  

Power Electronics: Designing and producing power electronics to integrate and manage renewable energy sources efficiently. 

Strategic Investments: 

RIL has committed over ₹75,000 crore (approximately $10 billion) to develop a comprehensive renewable energy ecosystem in India.  

The company secured a bid under India’s Production-Linked Incentive (PLI) scheme to produce up to 10 GWh of advanced chemistry cells, essential for electric vehicle (EV) batteries.  

RIL’s U.S. unit acquired a 21% stake in Wavetech Helium for $12 million, aiming to expand its low-carbon energy segment.  

Reliance Retail expanded its retail footprint in Q2FY25, opening 464 new stores and bringing the total count to 18,946. The total store operated area is at 79.4 million square feet. 

4. Increase in ARPU of Telecom businees: ARPU increased to Rs. 195.1/subscriber per month in Q2FY25 vs Rs. 181.7/subscriber per month in Q1FY25, driven by tariff hikes and better subscriber mix. Although the recent tariff hikes led to some SIM consolidation and a higher churn rate, the management expects the full impact of the hikes to reflect in the earnings over the next 2-3 quarters. 

Risks 

1. Huge Debt and Interest payments: Reliance Industries’ interest payments have seen a significant increase, rising from ₹3,849 crore in FY17 to ₹23,118 crore in FY24. This growth indicates substantial borrowing, likely linked to the company’s large-scale investments in telecom, retail, and renewable energy projects. While these investments are critical for long-term growth, high interest payments can impact profitability, as they reduce the net income available for reinvestment or shareholder returns. 

Reliance Industries, led by Mukesh Ambani, is in talks with six banks to secure a $3 billion loan to refinance $2.9 billion in debt due in 2025. The loan is expected to be syndicated by early 2025, marking Reliance’s return to international borrowing since 2023. Previously, the company raised over $8 billion, drawing interest from 55 lenders, including deals involving Reliance Jio. 

2. Exposure to project risk:  

RGHGCL’s project is currently at a nascent stage and is exposed to implementation and stabilisation risk. The company currently tied up non-fund-based bank limit of ₹120 crore primarily for submission of performance bank guarantee to GoI agency for its performance obligations under SIGHT programme. Project related risk is largely offset by RIL group’s strong experience of executing large-scale complex projects and control over manufacturing value chain. 

So, now we have discussed about the strengths and risks, now let’s see, Why has Reliance Industries’ stock delivered negative returns for the first time in a decade, and what key factors have contributed to this unprecedented downturn? 

Reliance Industries is facing several challenges impacting its performance. In the oil and gas and petrochemical segments, global headwinds and fluctuating crude oil prices are creating margin pressures. The telecom business is also facing slower-than-expected growth in Average Revenue Per User (ARPU). 

In the retail sector, ongoing restructuring and consolidation efforts are delaying opportunities to unlock shareholder value. Additionally, while Reliance has invested heavily in its new energy ventures, delays in operationalizing these projects and underperforming cash flows have forced the company to take on additional debt, adding to its financial burden. 

Financials: 

Over the years, Reliance Industries has demonstrated consistent growth in its financial performance. Sales have seen a steady upward trajectory, jumping from ₹303,954 crore in FY17 to ₹899,041 crore in FY24, showcasing the company’s expanding scale. Expenses have risen in tandem, reflecting the costs associated with growth, but the Operating Profit Margin (OPM) has remained stable, improving from 15% in FY17 to a robust 18% in FY24, highlighting operational efficiency. Notably, Other Income peaked in FY21 at ₹22,432 crore, contributing to resilience during challenging periods. The Net Profit has also displayed remarkable growth, nearly tripling from ₹29,833 crore in FY17 to ₹79,020 crore in FY24, underlining the company’s strong profitability and strategic execution. This performance underscores Reliance’s ability to scale while maintaining profitability and operational excellence. 

Shareholding Pattern: 

Reliance Industries’ shareholding shows a strong and stable pattern. Promoters’ holding has steadily increased from 46.32% in FY17 to over 50% since FY20, reflecting their confidence in the business. DIIs have significantly grown their stake, rising from 11.85% in FY17 to 16.98% in FY24, while FIIs maintained strong participation despite a slight dip from their peak of 25.66% in FY21. Public shareholding has decreased from 19.12% in FY17 to 10.46% in FY24 as institutions gained more prominence. The number of shareholders peaked in FY23, showing strong retail interest. This pattern highlights Reliance’s growing appeal to both institutional and retail investors. 

Growth Triggers:  

1. Fully Integrated Renewable Energy Ecosystem: Reliance is working towrads the development of the Dhirubhai Ambani Green Energy Giga Complex in Jamnagar is progressing rapidly. This giga complex will be one of the largest end-to-end integrated renewable energy manufacturing facilities globally.  

2. Government’s thrust for domestic manufacturing of green hydrogen:  

On January 04, 2023, Union Cabinet approved the National Green Hydrogen Mission with an outlay of ₹19,744 crore till FY30 with an objective to make India a global hub for production, usage and export of green hydrogen and its derivatives. By 2030, the mission intends to achieve domestic green hydrogen production capacity of 5 million metric tonne per annum (MMTPA) contributing to reduction in dependence on import of fossil fuels and cut in greenhouse gas emissions. 

3. Significant importance of the new energy business: 

 After telecom and retail, new energy is the focus area and expected to be the next growth driver for RIL group. RIL has initial investments plan of ₹75,000 crore for the near term to build five giga factories of photovoltaic panels, energy storage, green hydrogen, fuel cell system and power electronics and has also made acquisitions on the technology side in the last three years. RGHGCL’s business operations shall remain strategically important for the group for supporting its transitioning towards the usage of cleaner alternatives and achieving the net-zero carbon target. 

ESG:  

Environmental:  

RIL commissioned its first commercial scale CBG plant in a span of just 10 months › ‘A’ CDP Rating for RJIL. 

Reliance’s ambitious Net Carbon Zero goal elevates both the challenges and opportunities to a globally impactful and transformational level, surpassing any of its past endeavours. Reliance has consistently adhered to its core business principles, and this approach remains unchanged in its journey towards a ‘Net Carbon Zero’ future. 

To achieve its ambitious Net Carbon Zero target by 2035, Reliance announced plans to: Establish and enable 100 GW of renewable energy by 2030. Invest In the value chain, partnerships and future technologies, including upstream and downstream industries. Build Giga factories to create and offer a fully integrated, end-to-end renewable energy ecosystem. Transform Its business to Net Carbon Zero operation. 

Reliance has faced multiple environmental challenges, particularly in the context of its large-scale industrial operations. One notable case was related to the Jamnagar Refinery in Gujarat. In 2014, the company was accused of violating environmental regulations, particularly regarding emissions and the handling of toxic waste. The Gujarat Pollution Control Board (GPCB) imposed fines on Reliance for exceeding pollution limits. The company worked to resolve the issues, but it highlighted the ongoing regulatory challenges faced by large corporations in the industrial sector. 

Social:  

Aimed at empowering rural communities, the Rural Transformation programme of Reliance Foundation continued to evolve through FY 2023‑24. During this year, the programme focused on climate resilience and sustainable rural livelihoods reaching 2,6 million+ people. 

During the FY 2023-24, Reliance contributed C1,592 crore as part of various impactful CSR initiatives across the country. 

Total 84,000+ women empowered through digital literacy skills. 

Reliance Foundation Founder and Chairperson Smt. Nita Ambani was awarded the ‘Citizen of Mumbai’ Award 2023-24 by the Rotary Club of Bombay for her contributions to healthcare, education, sports, arts and culture. 

Governance:  

The Gas Migration Case involving Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation (ONGC) centered on allegations that Reliance had extracted natural gas that migrated from ONGC’s blocks in the Krishna-Godavari (KG) Basin to its KG-D6 block 

1. Allegation: In 2015, ONGC claimed that Reliance was siphoning gas from its adjoining KG-Basin blocks due to natural migration. 

2. Independent Study: A US-based consultant, DeGolyer and MacNaughton, confirmed that gas migration had occurred, bolstering ONGC’s claims. 

3. Government Action: The Ministry of Petroleum and Natural Gas reviewed the matter and determined that Reliance must compensate for the extracted gas. 

4. Reliance’s Stand: Reliance denied wrongdoing, arguing that gas migration is a natural phenomenon and that it operated within the boundaries of its block. 

5. Resolution: Reliance was directed to pay ₹1,700 crore as compensation for the alleged unauthorized extraction, bringing the dispute to an end. The company complied with the payment but maintained that it followed the rules. 

In 2017, Reliance faced legal scrutiny over the sale of telecom towers, accused of underreporting the proceeds. The Department of Telecommunications (DoT) claimed the company didn’t meet the terms of the sale agreement, raising concerns over its financial transparency. 

Additionally, Reliance’s proposed acquisition of Future Group’s retail assets sparked a legal battle with Amazon, which alleged the sale violated an existing contract. The case is ongoing and involves the National Company Law Tribunal (NCLT) and the Supreme Court of India.  

Conclusion: 

In conclusion, Reliance Industries continues to generate substantial profits, with its established verticals performing exceptionally well. However, as highlighted by the company in its reports, conference calls, and AGMs, the new energy businesses, once fully operational, are poised to be a game changer, potentially reshaping the company’s future. The timely commencement of these operations is crucial for realizing this transformative potential. Additionally, Jio’s continued growth and innovation are expected to play a significant role in Reliance’s success. While the company’s future appears promising, it is essential for investors to conduct thorough research and due diligence before making any investment decisions to ensure they align with their financial goals. 

Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.