Reliance Industries Ltd (RIL) has fallen over 20 per cent since July 2024 high, but Emkay Global sees a window of outperformance, driven by multiple positives. It sees demand recovery for Reliance Retail in FY26, tariff hikes for telecom business, and RIL turning free cash flow in FY26 on moderating capex. The stock performance is poised for an upswing amid underinvestment by mutual funds and foreign investors, it said.
Here are five reasons why the RIL stock may outperform market going ahead.
1) Emkay Global noted that the RIL management attributed the soft FY25 for the retail business to specific action on stores that was pending since the pandemic, though the brokerage believes the generic demand slowdown also contributed.
"Both these issues could be resolved in FY26, with store additions back on track and our macro view that consumption should bounce back in FY26. We expect retail to deliver 15 per cent/18 per cent revenue/Ebitda growth, and there is upside potential to this," Emkay Global said.
2) Emkay Global said RIL's operating cash flow (OCF) to Ebitda stayed strong at 90 per cent and, with moderating capex, free cashflow (FCF) may turn positive in FY26, followed by 59 per cent growth in FY27. The stock trades at FCF yield of 1.8 per cent/2.9 per cent on FY26/FY27 after four years of negative FCF.
"Accelerated investments in green energy are a risk to these forecasts, but unlikely to upset the apple cart. Reliance trades near its five-year mean at 1.9 times P/BV, and a turn in FCF is a catalyst for a rerating in our view," Emkay Global said.
3) Emkay Global has built in 7.2 per cent ARPU growth for FY26 for telecom business, which is the base level without tariff hikes. If India’s domestic macro recovers and income levels start to rise again, tariff hikes could come through after the festive season and that would be an upside to forecasts, it said.
The brokerage noted that a 10 per cent tariff hike generally translates into a 15 per cent Ebitda surprise for the telecom business and 6 per cent for the overall RIL.
4) RIL's oil-to-chemicals (O2C) business may face a challenging period over the next two years due to a weak cycle, which is already accounted for in consensus estimates. Notably, new energy valuations contribute minimally, at 5.1 per cent of the sum-of-the-parts enterprise value, yet they hold potential upside if certain projects succeed, Emkay Global said.
5) Meanwhile, Reliance remains under-owned, with mutual funds and foreign portfolio investors reducing their stakes significantly since March 2023. Emkay said underinvestment by institutional investors could position Reliance for substantial stock inflows should there be any positive shifts in fundamental performance. MFs and FPIs have shrunk weightage from 4.4 per cent and 8 per cent in RIL in March 2023 to 3.4 per cent and 4.5 per cent in December 2024, severely underperforming against Nifty and BSE500 weights of 8.2 per cent/4.9 per cent. Any positive momentum in fundamentals could trigger large flows into the stock, Emkay Global said.