 "Reliance industries, Reliance oil business")
Reliance Industries Ltd (RIL) was one of the biggest losers among Sensex stocks on Monday, falling 2.4 per cent compared to the index’s 0.15 per cent decline.
The stock is now down 21.2 per cent since the end of March last year, while the benchmark index has lost just 0.8 per cent over the same period. RIL shares (at ₹1,171.10 apiece on the BSE) have fallen to their lowest level in 17 months (since November 2023), lagging an index that remains nearly 9 per cent higher in that span.
RIL’s recent share price weakness and its underperformance on the bourses are linked to sluggish earnings growth and a widening gap between its equity valuation and key profitability metrics such as return on equity (RoE). The company’s consolidated trailing 12-month net profit has remained stagnant for nearly two years, even as the stock hit record highs through June last year, creating a disconnect between earnings and market capitalisation.
RIL’s net profit (on a trailing 12-month basis) climbed 65 per cent cumulatively between March 2020 and June 2023, but its share price surged 145 per cent over the same period. The recent pullback in RIL shares has largely narrowed this valuation gap.
“RIL has underperformed over the past few years and delivered negative returns in CY24, the first such decline in the past 10 years. We believe RIL’s recent underperformance has been driven by continued earnings downgrades due to growth moderation in Reliance Retail and weak refining and petchem cracks,” analysts at Motilal Oswal Securities wrote in a recent report.
Other analysts also point to the gap between RIL’s price-to-earnings (P/E) multiple and its relatively weak RoE. The company’s RoE — a key profitability measure — has remained in the single digits for nearly two years as net profit has failed to keep pace with balance sheet expansion. Meanwhile, RIL’s P/E multiple has stayed elevated.
The company’s current RoE, based on its balance sheet for the first half of FY25 and earnings for the third quarter, stands at around 8.44 per cent, nearly 250 basis points below its 15-year average of 11 per cent. In contrast, RIL trades at a P/E multiple of 22.9x, about 270 basis points above its 15-year average of 19.2x.
“Typically, a company with higher RoE commands a higher P/E multiple and vice versa. A valuation decline usually follows a drop in RoE, though not always simultaneously,” said a research analyst on condition of anonymity.
Before the Covid-19 pandemic, RIL traded at a discount to the Sensex, reflecting its lower RoE. However, in the past four years, it has commanded a premium despite little improvement in profitability, creating a valuation gap.
Currently, the Sensex companies’ RoE stands at 18.4 per cent, more than twice that of RIL and up nearly 560 basis points since the March 2020 quarter. By contrast, RIL’s RoE has contracted by nearly 20 basis points in the same period.
