As Reliance Industries Ltd.'s shares have continued to slide and underperform the benchmarks, a Jefferies report has noted that "pessimism seems extreme" around the stock as the outlook has turned negative for its retail unit which is eyeing market debut.
Shares of the Mukesh Ambani led-conglomerate have slumped about 25% from their peak last year, with its market capitalisation falling by over Rs 5 lakh crore. During the same period, the Nifty 50 has fallen 7.4%, led by foreign exodus.
This underperformance to Nifty is due to a slowdown in retail and subdued earnings in the oil-to-chemicals segment, according to Jefferies. With this, "pessimism seems extreme" as the current market cap for Reliance Retail Ltd. implies $48 billion, a sharp fall from $106 billion in the last funding round. This is assuming the fair values of Jio and the oil business have been unchanged since mid-2024.
This comes amid reports that Reliance Retail is cutting jobs and taking other cost-cutting measures like limiting expansion, in a bid to boost valuations before its initial public offering kicks off.
According to the Bloomberg report, Ambit Capital Pvt. has slashed the valuation of the retail unit to $50 billion, a discount to $125 billion that the group aims, ahead of going public. The news agency also learnt that there will only be a 5% dilution when going public.
However, Jefferies said that the "worst is behind" in the retail business. A combination of same-store growth and area addition should restore 15% growth in retail in fiscal 2026. A tariff hike, likely listing of Jio, and improvement in oil-to-chemical profitability are other potential triggers.
The brokerage maintained its 'buy' on the stock with a target price of Rs 1,660 per share, implying an upside of 38% from the current level.
Meanwhile, the strong performance of Bharti Airtel Ltd.'s stock since July suggests the weakness in Reliance shares is not attributable to concerns in Jio, the report said. Jio could outperform its peer set on average revenue per user growth in near term, as it has not fully realised the impact of previous tariff hikes in revenues.
The softness in the oil-to-chemical business could reverse refining recovery, and Jefferies expects a 14% growth in its operating profit.
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