Reliance Industries (RIL) has had a forgettable year in 2024, with its stock expected to close the year with a loss. This is the first decline of this kind to hit the Mukesh Ambani-led corporation in almost ten years.

Since its July peak, RIL's market value has fallen by more over Rs 4.4 lakh crore, and its shares have fallen by nearly 21% from their peak of Rs 1,608.95.

RIL's growth halted following several years of strong performance, including a 70.55% return in 2017 and continuous growth from 2018 to 2020. In 2021, 2022, and 2023, the returns plummeted to 19.32%, 7.60%, and 1.44%. This expected negative return in 2024 contrasts sharply with the company's prior growth, as declining profitability is exacerbated by a challenging economic environment.

Analysts have been more pessimistic, citing slower growth, increased real estate costs, and the capital required to sustain expansion. Furthermore, the fast emergence of e-commerce companies has put pressure on sales and margins, particularly in the retail industry.

Challenges for Reliance Retail

Reliance Retail (RR) has encountered significant issues in 2024, owing to sluggish demand, particularly in fashion, and the difficulties of operating in a high-base environment from the previous year.

Despite increased foot traffic, the company has had to close 1,185 locations and has had slow sales growth in recent years. Compounding these concerns is the rise of quick commerce (QC) enterprises, which is increasing competitiveness in the retail market.

However, Jefferies continues to see RR as a dominant player in retail due to its size and market leadership. The global brokerage recommends that the business focus on high-impact initiatives and improve transparency for greater investor understanding, while keeping a buy call on RIL with a price objective of Rs 1,700 on SOTP basis.

What Happens Next for RIL?

Another global brokerage firm, JPMorgan, emphasizes RIL's good relative valuations, adding that in a market where most equities are trading above historical levels, RIL remains appealing. To drive further stock increases, the firm believes RIL will need either improved refining/petchem margins or higher retail valuations.

Reliance Retail is now valued at a lower multiple than peers such as DMart, thus any increase in retail values, possibly through an IPO or stake sale, could enhance RIL's stock.

Historically, RIL's growth has been driven by capital expenditure (capex) in refining and chemicals, or margin cycles. However, RR and Telecom currently account for over half of RIL's EBITDA and are likely to generate almost all EBITDA growth over the next three years.

Despite negative free cash flow (FCF) in recent years due to telecom spending, RIL is predicted to generate positive FCF in the future, with an annual EBITDA of approximately $20 billion. The company has also pledged to keeping its net debt-to-EBITDA ratio below 1x, indicating good FCF generation.

JPMorgan's target price for RIL is Rs 1,468, based on a sum-of-the-parts (SOTP) valuation using Sept-26E EV/EBITDA multiples. While RIL's refining margins have improved, the retail division continues to confront issues.

According to JPMorgan's Sanjay Mookim, RIL's retail valuation is 33x FY26E EBITDA, which is lower than DMart's multiple of 42x. Any improvement in retail valuations could benefit RIL's stock.

Ambani's Declining Fortune

RIL's challenges are mirrored in the fortunes of Mukesh Ambani, Asia's richest man. His net worth has declined from a high of $120.8 billion in July, around the time of his son Anant Ambani's wedding, to $96.7 billion on December 13.

Ambani is currently shifting his strategy toward digital platforms, retail brands, and renewable energy to fuel future growth.