Reliance Industries Limited (RIL) navigated a challenging fourth quarter, with its energy business facing significant headwinds, yet its consumer segments, including Jio and retail, demonstrated robust growth, prompting analysts to reassess their outlooks.
Key Points
- RIL's Q4 performance fell short of brokerage expectations due to significant headwinds in its O2C and exploration segments, which recorded multi-quarter lows in production and realisations.
- Despite the overall disappointment, RIL's consumer businesses, particularly Jio, showed robust year-on-year growth, with Jio's profits increasing by 16% and contributing 42% of consolidated segment profit.
- Brokerages like Dolat Capital and Motilal Oswal Research have revised earnings estimates and target prices downwards for RIL, citing ongoing energy business challenges and potential delays in Jio tariff hikes.
- Most brokerages have maintained a 'buy' rating on RIL stock, despite target price cuts, primarily due to attractive valuations and the stock's recent underperformance compared to the Nifty 50.
- The retail business exhibited mixed results, with strong topline growth in grocery, fashion, and consumer electronics, but profitability was affected by scaling up investments in quick commerce platforms like JioMart.
Weighed down by multiple headwinds facing its energy business, the March quarter results of the country's most valued company missed brokerage expectations.
Production volumes and realisations at Reliance Industries Limited's (RIL) oil-to-chemicals (O2C) as well as exploration segments hit multi-quarter lows.
Given that the two account for just under 40 per cent of segment operating profits, a 4-18 per cent year-on-year (Y-o-Y) fall in the two led to a flattish consolidated operating performance.
The disruption due to the Iran war negated the robust growth in the consumer businesses of telecom and retail Y-o-Y.
Challenges in Energy Business
While the key triggers remain the listing of its telecom venture Jio and the progress in new energy business — especially solar — the stock could face pressure in the near term, given the fourth quarter (Q4FY26) disappointment and pressure on O2C segment.
Though some brokerages have cut their earnings estimates and target prices, they have maintained a 'buy' rating on the stock.
This is on account of valuations and the correction/underperformance of the stock over the past month, as compared to the benchmark Nifty 50.
The O2C business faced elevated crude oil procurement costs, negative integrated naphtha cracker margins, weak polymer deltas amid high feedstock prices, and negative auto fuel marketing margins (up to Rs 5.2/litre), which dragged down earnings by an estimated Rs 1,100 crore, said Yogesh Patil and Snehdeep Arora of Dolat Capital.
The challenging situation has not improved much yet, they said.
The brokerage has revised its net profit estimates upwards, citing benefits of higher cracks, upside from higher oil prices in the oil and gas segment and Jio's average revenue per user-led (ARPU) growth supported by tariff hikes.
It has upgraded its target price by Rs 25 to Rs 1,695 per share, as well as its recommendation to 'buy' from 'accumulate'.
Jio and Retail Performance
With a 16 per cent Y-o-Y growth in profits at the operating level (consolidated growth at 4.2 per cent) and accounting for about 42 per cent of consolidated segment profit, Jio was the star of RIL's Q4 show.
Overall revenues of the segment saw a growth of 12.6 per cent Y-o-Y, led by a rise in the number of subscribers by 7.4 per cent and 3.8 per cent uptick in ARPU.
Profit growth was also led by a rising share (54 per cent) of the subscriber mix on 5G.
Motilal Oswal Research cut its revenue and operating profit estimates for Jio by 1-2 per cent, due to delays in the tariff hike and rising share of machine-to-machine (M2M) subscribers (autonomous devices/sensors) in the mix.
They expect the next round of tariff hikes (15 per cent or Rs 50/month on the base pack) in Q2FY27 with a possibility of a delay.
While the brokerage has cut its FY27 earnings due to challenges in the energy business and delays in tariff hikes in RJio, it believes that the telecom business remains the biggest growth driver and expects digital to contribute 80 per cent of RIL's incremental operating profit going ahead.
The incremental gains, according to analysts led by Aditya Bansal, will be driven by the wireless tariff hike, market share gains in wireless, and the continued ramp-up of homes and enterprise offerings.
The brokerage has reiterated a 'buy' rating, but cut its target price to Rs 1,655 apiece from Rs 1,715, given the weakness in the energy business.
Retail Business Outlook
The performance of the retail business was a mixed bag, with topline growth coming in at a robust 14 per cent on a comparable basis, while operating performance lagged behind.
Even as revenues were driven by the grocery, fashion and consumer electronics, scaling up of investment in JioMart — the quick commerce segment — weighed on profitability.
JioMart has expanded quickly, with daily average order rising 29 per cent sequentially and four times over the year ago quarter, led by electronics and fashion and lifestyle categories.
Motilal Oswal Research expects store pickup additions and increased momentum in quick commerce to support double-digit revenue growth for Reliance Retail over the medium term.
However, near-term profitability is likely to be adversely impacted by losses in quick commerce. While store additions remained muted for the retail business in Q4, Systematix Research said that a scale-up of quick hyperlocal deliveries on JioMart and AJio remains a key growth driver.
The brokerage expects the retail business to deliver a 12 per cent revenue and operating profit growth over FY25-28.
It has a 'buy' rating and retained its target price on the stock at Rs 1,700.
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