Shares of Reliance Industries Ltd have fallen 15 per cent in the past three months and if one were to go by Kotak Institutional Equities, the poor show can be attributed to the oil-to-telecom major's relatively weak performance in Reliance Retail and a lack of near term catalysts. The domestic brokerage sees a slower pace of store additions for Reliance Retail in FY2025, driven by store rationalisations.
Kotak said the large market share gain by quick commerce companies is impacting Reliance Retail and can keep revenue growth and/or margins stagnant in the near term. In the case of oil-to-chemicals (O2C) segment, while the refining margins improved sequentially in Q2, they remained weak overall. The Petchem business also remained in down-cycle, it said.
"With telecom hikes already in place and retail/O2C remaining subdued, there is a lack of near-term catalysts. Maintain ADD with a revised fair price of Rs 1,405 from Rs 1,560 earlier," Kotak said.
On Monday, the stock rose 0.70 per cent to Rs 1301.45 level. Kotak's fair value on the stock suggests a potential 8 per cent upside over the prevailing price.
Kotak has trimmed its FY24-27 revenue and Ebitda estimates by 2-3 per cent for Reliance Retail, thanks to lower-than-expected run-rate of retail area addition in H1FY25 on account of store rationalisation as well as slower new store additions. It also accounted for market share gains by quick commerce companies.
The latter can result in weaker revenue growth and/or keep margins stagnant for Reliance Retail, Kotak said.
"In line with the reduction in the valuation multiple for Dmart, we trim our target multiple for RR to 28 times. We also now assign nil option value to new/emerging businesses given curtailment of operations of JioMart B2B and limited scale-up of jiomart.com," it said.
Kotak said the net area addition by Reliance retail will improve in H2FY25, but YoY area addition will still be lower than the pace witnessed previously. For now, it is assuming normalised area addition from FY2026 onward, assuming most store rationalisations etc will be complete in FY2025.
In the case of RIL's O2C segment, Kotak said India is fairly surplus in refining capacity and there is no need to set up new refining capacity in this sunset industry. Yet, currently 44 mmtpa (17 per cent of current 257 mmtpa) is under construction by PSUs. In addition, at least two more greenfield refineries are actively being considered.
"In our view, the large capacity addition will reduce OMCs’ need to procure transport fuels from private refineries and is an overhang. Similar to OMCs, private fuel marketers such as Reliance are benefiting from elevated marketing margins on auto fuels and have increased market share. But, with limited addition of retail outlets, the upside seems not high for Reliance," it said.
Kotak said the RIL's Petchem business remains in downcycle with prices/margins remaining weak. With recovery in Henry Hub prices, the US ethane prices are also firming up and will likely increase feedstock costs, it said.
"Driven by retail, our earnings stand reduced by 1 per cent for FY2026/27E. In line with the reduction in the multiples of D-Mart, we trim our target EV/Ebitda multiple for the Retail business to 28 times (32 times earlier). We also now assign NIL option value to new/emerging business of Retail. We have also cut our multiple for E&P to 4 times EV/Ebitda from 5 times," it said.