
RIL’s Q3 may have set the floor for the stock, but upside catalysts remain elusive

Summary
- Most brokerages are upbeat on the stock’s prospects after the Q3FY25 results, but a lack of clarity on listing the telecom and retail businesses continues to play spoilsport.
Reliance Industries Ltd (RIL) stock’s underperformance in 2024 was striking, falling by 6% against Nifty50’s 9% gain. The good news is the December quarter (Q3FY25) results signal that the worst might be over in terms of pressure on its two businesses. Profitability in the oil-to-chemicals (O2C) division and revenue growth in the retail segment grew year-on-year after declining in Q2FY25.
Still, the stock lacks catalysts such as a listing of the company’s telecom and retail verticals. Progress on the new energy business is also critical. While the Street will cheer any update on these fronts, the stock’s valuation based on annual sustainable Ebitda (excluding minority interest) of ₹1.5 trillion translates to an EV (after considering spectrum liability) to Ebitda of 12x, which may limit the downside.
Also read: L&T Tech's Q3 excites, but don’t ignore near-term headwinds
The O2C business has likely bottomed out despite continued year-on-year pressure on gross refining margins of transportation fuels such as petrol, diesel and aviation turbine fuel (ATF). Note that these fuels account for nearly 60% of the refinery’s throughput. Despite this, the segment reported 2% growth in Ebitda to ₹14,402 crore, reversing the trend of declining Ebitda in the first two quarters of FY25 (by 14% and 24%). The recovery is largely due to the sequential rise in margins on diesel and ATF, even as the margin on petrol dipped further
Retail therapy
RIL’s retail business revenue increased by 7% year-on-year to ₹79,595 crore. The number of stores rose by just 2%, meaning the average revenue per store grew by 5%, which is still unexciting. Retail Ebitda margin, though up 20 basis points (bps) year-on-year to 8.3%, is down 20 bps sequentially, indicating margin improvement is unlikely to be linear as it faces competition headwinds. As the company had increased its focus on rationalising operations and finetuning the B2B business to improve margin, it should have at least maintained the Ebitda margin sequentially.
Also read: Hospital chains set for stable Q3 despite seasonal challenges
The telecom business, a part of Jio Platforms, did not have any surprises. The average revenue per user (Arpu) inched up to ₹203 from ₹195 in Q2FY25 as the benefit of earlier tariff hikes gradually percolated. Arpu growth – either through tariff hikes, premiumisation of higher data consumption through 5G, and prepaid-to-postpaid conversion – has the potential to drive performance even as subscriber growth was barely 1% quarter-on-quarter. With high levels of penetration, mobile subscribers are unlikely to grow significantly. Home broadband customers can grow, and have a higher Arpu as Jio AirFiber gains traction.
Digital revenue or non-connectivity revenue (excluding telecom) grew faster than telecom at 12% quarter-on-quarter and 62% year-on-year. However, digital still accounts for a mere 11% of Jio Platform’s revenue.
Higher holdco discount
As such, the concern for shareholders is that as clarity on the listing of the telecom and retail verticals remains elusive, brokerages such as Nuvama Institutional Equities believe “ratcheting up of holdco discount is justified" and have raised the holdco discount from 15% to 20%.
A holding company discount or holdco discount comes into play when the main business activity is being carried out by a subsidiary and the parent company merely holds an investment in it. For example, RIL is a holding company and telecom and retail businesses are carried out by subsidiary companies. In such cases, the valuation of the holding company is derived by applying a discount to the valuation of the subsidiary companies.
Also read | Rupee tantrums: The risk and cost of RBI's approach
Though Nuvama’s sum-of-the-parts base target price of ₹1,673 leaves sufficient headroom, there is a risk of the holdco discount rising, which could easily slash the target price by 5%. Also, Nuvama’s target price includes a 13% contribution from the new energy business, where progress remains unclear. Nuvama believes the new energy business will equal O2C on profits in five to seven years and add more than 50% to consolidated profit after tax, which would be of much higher value as it involves clean energy.
Though Citi’s target price is less optimistic at ₹1,530, most brokerages are upbeat on the stock’s prospects after the Q3FY25 results. On Friday, RIL shares were trading at ₹1,286, up more than 1% after the results.