Reliance underperforms Nifty 50; Motilal Oswal sees re-rating triggers—here’s why it’s bullish on the stock

After several years of underperformance, shares of Reliance Industries could be gearing up for a solid up move, as a combination of factors positions it as a candidate for re-rating in the calendar year 2025.

Over the last five years, Reliance Industries’ share price has underperformed the benchmark Nifty 50, gaining only 65 per cent compared to the Nifty 50’s 89 per cent rise.

In the past three years, Reliance shares have managed a modest 5 per cent increase, significantly trailing the Nifty 50’s 35 per cent jump.

Over the last year, the underperformance has been even starker, with Reliance shares declining 8 per cent while the Nifty 50 climbed 8 per cent.

For the first time in the past 10 years, shares of Reliance Industries have given a negative return on the calendar year 2024.

Brokerage firm Motilal Oswal Financial Services is enthusiastic about the stock. With a buy call, the firm has a target price of ₹1,605, implying a 29 per cent upside potential.

India’s largest stock’s poor performance in the last few years could be attributed to earnings downgrades due to subdued growth in the company’s retail, refining, and petrochemical businesses.

“We believe continued earnings downgrades have driven Reliance Industries’ (RIL) recent underperformance due to growth moderation in Reliance Retail (RR) and weak refining and petrochemical cracks,” said Motilal Oswal.

“After the steep correction of 17 per cent in the last six months, we believe the risk-reward is compelling as RIL now trades at our bear case valuation –Reliance Jio (RJio) at a 10 per cent discount to Bharti’s current valuation, high-single-digit growth in core retail revenue/EBITDA and no improvement in O2C earnings over FY24-27E,” said the brokerage firm.

Motilal Oswal estimates a CAGR of nearly 10 per cent in consolidated EBITDA and PAT each over FY24-27, driven by a double-digit EBITDA CAGR in RJio (wireless tariff hikes and FWA ramp-up) and mid-teen growth in Reliance Retail over FY26-27.

The brokerage firm expects earnings to recover for the O2C (oil-to-chemicals) segment, driven by improvement in refining margins. However, the brokerage firm underscored that its FY27E consolidated EBITDA estimates for O2C and E&P (exploration and production) are broadly similar to FY24 levels, which could have upside risks.

Using the SoTP method, Motilal Oswal values the O2C and E&P segments at 7.5 times and 6 times, respectively, Mar’27E EV/EBITDA to arrive at an enterprise value of ₹444 per share for the standalone business.

The brokerage firm pegs an equity valuation of ₹515 per share and ₹610 per share to RIL’s stake in JPL and RRVL, respectively. It assigns ₹75 per share to the new energy business and ₹26 per share to RIL’s stake in Disney JV.

Reliance Industries stock: Khe drivers of potential re-rating

1. RJio could be the biggest earnings growth driver

Motilal Oswal observed that the flow-through of the July 2024 tariff hike has been decent, with ARPU (average revenue per user) rising nearly 12 per cent over the last two quarters. The brokerage firm believes the full benefits of tariff hikes may accrue by March 2025.

Motilal Oswal expects tariff hikes to be more frequent, given the consolidated market structure in the Indian telecom industry, higher data consumption, lower ARPU, and inadequate returns generated by telcos.

“We continue to build in a nearly 15 per cent tariff hike (or ₹50 per month increase in base pack in December 2025,” said the brokerage firm.

Despite Vodafone Idea’s (Vi) large capex plans, the brokerage firm believes RJio (and Bharti) will likely continue to gain market share at Vi’s expense.

It also expects RJio’s fixed broadband connections to reach nearly 3.5 crore by FY27 and the contribution from the broadband business to increase to nearly 12 per cent by FY27 versus nearly 7 per cent currently.

“With an estimated CAGR of nearly 17 per cent and 20 per cent in revenue and EBITDA, respectively, over FY24-27, RJio is likely to be the biggest growth driver for RIL in the medium term,” Motilal Oswal said.

2. Growth recovery of Reliance Retail crucial

Motilal Oswal underscored that over the past few quarters, Reliance Retail (RR) has been streamlining its operations by closing unprofitable stores and adopting a more calibrated approach to the B2B business. This has improved the operating EBITDA margin in nine months despite a rising share of low-margin connectivity business.

“With streamlining of operations nearing an end, we expect RR to get back to mid-teen revenue/EBITDA growth from FY26 onward, driven by store footprint additions and ramp-up of new categories/formats,” Motilal Oswal said.

“RR is the biggest contributor (nearly 38 per cent) to our SoTP valuations for RIL, and a recovery in its growth is likely to be the biggest trigger for the stock. In our base case, we estimate a modest CAGR of 8.5 per cent and 12 per cent in RR’s core retail and overall gross revenue, respectively, over FY24-27, with broadly stable EBITDA margin of 8.3 per cent by FY27,” said Motilal Oswal.

3. Oil-to-chemical (O2C): Mixed trends

Motilal Oswal estimates RIL’s standalone GRM (gross refining margin) of $8.9/9 per bbl in FY26/FY27. The brokerage firm noted that for every $1/bbl change in GRM, RIL’s EBITDA changes by nearly ₹42 billion, nearly 2 per cent of FY26 and FY27 consolidated EBITDA.

Meanwhile, the brokerage firm does not expect a sharp recovery in petrochemical cracks.

“Petrochemical cracks have remained weak, and we do not expect a sharp recovery in the next few quarters as global capacity additions remain aggressive for products such as PE and PP, based on the commentary from South East Asian petrochemical players,” said Motilal.

4. New energy earnings to ramp up FY28 onward

Motilal noted that RIL has invested $3-4b so far in new energy. It believes as the integrated solar PV and battery ventures commence, the balance of $6-7b will be invested over the next two to three years.

Further, given the company’s plan to set up 100GW of RE generation, Motilal said that the initially guided capex of $10b will likely be exceeded.

“We believe RIL’s Solar PV factory can generate EBITDA of ₹72b at full utilization in FY29E. We estimate RoE and RoCE of 16 per cent and 9 per cent, respectively, at full utilisation,” said the brokerage firm.

“We do not build in any contribution from new energy until FY27, though we believe that with scale and cost/technology superiority, new energy could be the key profit growth driver for RIL in the longer term,” the brokerage firm added.

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