Reliance's Refining Margins Recover, Retail Growth Uncertain: JP Morgan

A recent report by brokerage firm JP Morgan has highlighted a mixed outlook for Reliance Industries Ltd, as the company faces a recovery in its refining margins but continues to grapple with sluggish growth in its retail segment. Reliance’s stock has declined by 22 per cent since its peak on July 8, compared to a 3.3 per cent drop in the NIFTY index, marking a stark reversal of the outperformance the company had shown earlier in the year. Despite the market downturn, Reliance's relative valuations remain attractive, particularly as most stocks are trading well above historical levels.

The company, led by billionaire Mukesh Ambani, operates across three primary sectors: oil refining and petrochemicals, telecom via Jio, and retail. It also has a media division and an emerging energy business. According to JP Morgan, Reliance’s retail and telecom operations now account for nearly half of its total EBITDA for FY24, with these segments expected to drive nearly all of its EBITDA growth over the next three years. Despite substantial capital expenditure plans for its new energy projects and retail business expansion, Reliance is expected to generate positive free cash flow in the next few years.

JP Morgan identified two key challenges impacting Reliance’s performance: 1) the sharp decline in refining margins since June, and 2) disappointing revenue and EBITDA growth at Reliance Retail. However, the brokerage noted that refining margins have recently recovered, with third-quarter results showing improvement. Furthermore, the reduction of Chinese export tax rebates could potentially support these margins by narrowing the gap between crude oil prices and finished product prices.

On the retail front, the report raised concerns about the impact of a general slowdown in the retail sector, combined with internal restructuring at Reliance Retail. The ongoing uncertainty surrounding Quick Commerce, a rapidly growing e-commerce trend, has also contributed to investor concerns. As a result, the brokerage has lowered its retail EBITDA forecast for FY25-26 by 10-15 per cent, although it pointed out that retail still represents a small portion of the company’s total earnings, meaning the impact on Reliance's overall profit forecast is limited.

JP Morgan also noted that some of Reliance's solar manufacturing capacities, including modules and cells, are expected to be commissioned by March. While the immediate profitability from this business may be limited, the strong local demand for solar products could lead to a shift in strategy. Any announcements regarding these solar projects could boost Reliance’s stock, given the high valuations of recently listed solar companies in India.

The report also touched upon the potential listing of Jio and Reliance Retail, though it noted that these listings could be delayed due to recent market volatility and the large scale of the issuances.
Despite these challenges, Reliance's diversified business model and robust cash flow continue to provide resilience, even as its retail segment faces ongoing pressures.