Reliance shares are down 17% despite soaring refining margins. What the market is missing

Billionaire Mukesh Ambani-led Reliance Industries Ltd (RIL) shares have fallen around 17% this year, underperforming the Nifty’s roughly 8% decline, even as refining and petrochemical margins have surged. The stock has remained largely range-bound since the end of May, leaving investors with a sharp valuation puzzle: why has a stronger oil-to-chemicals cycle failed to lift India’s most diversified conglomerate?

The answer, according to analysts tracking the stock, is that the market is looking beyond the current earnings boost. It wants evidence that Reliance Retail can restore growth, that the company’s New Energy investments will begin creating value and that the group can generate free cash flow while continuing to invest across multiple businesses.

There is also a broader concern: the market may not be willing to assign full value to businesses whose earnings visibility remains uneven.


Also Read |Rs 35,000 crore Jio IPO may not be a jackpot for Reliance investors. Here's why

Refining margins have surged

The operating backdrop for Reliance’s oil-to-chemicals business has improved sharply. Jefferies estimates that about 4% of global refinery throughput has been lost because of conflicts. The Middle East has seen around 2.5 million barrels a day of refinery run cuts, while Russia has suffered another 1.5 million barrels a day of reductions over the past year.

The disruption has pushed diesel and gasoline inventories to five-year lows. Singapore gross refining margins averaged $21.2 a barrel in the second quarter of FY27 so far, compared with $7.5 a barrel in FY26.

Petrochemical spreads have also strengthened. Reliance’s average polyethylene, polypropylene and polyethylene terephthalate margins rose 64% in the second quarter of FY27 so far compared with the end of February, according to Jefferies.

Reliance’s special economic zone refinery, which accounts for most of its refining capacity, is also exempt from windfall taxes, allowing the company to benefit from the elevated refining environment.

Jefferies expects the strength in refining and petrochemicals to support Reliance’s FY27 earnings and projects a 10% consolidated EBITDA compound annual growth rate between FY26 and FY29. It maintains a Buy rating and a price target of ₹1,710.

Also Read |Mukesh Ambani’s long game: How Reliance could turn a 3-year spending spree into Rs 90,000 crore of free cash flow

Why RIL stock has not responded

JPMorgan’s assessment is that the market is already looking beyond the immediate O2C earnings boost.

“Further stock returns would need either: (1) stronger refining/petchem margins — such a large beat appears unlikely, given current refining/petchem utilization rates; or (2) higher valuations for Reliance Retail,” the brokerage said.

Refining margins are already unusually strong, meaning a further sharp improvement may be difficult. If margins remain elevated, they can support earnings, but may not be enough to create a fresh valuation trigger.

JPMorgan estimates that the current stock price implies a valuation of 7.5 times EBITDA for the O2C business, peer-comparable multiples for the major subsidiaries and about a 25% holding company discount. It assigns no value to Reliance’s proposed renewables venture, real estate holdings or rapidly growing FMCG revenues.

JPMorgan has an Overweight rating and a September 2027 price target of ₹1,625.

Retail is the bigger valuation debate

Reliance Retail remains the most important swing factor in the valuation. JPMorgan estimates the business at about 26 times blended FY28 EBITDA, below DMart’s roughly 34 times. That suggests potential upside if Reliance Retail can accelerate growth and improve its valuation multiple.

But the brokerage also flags risks. Retail multiples could fall further if peer valuations contract or if Reliance Retail fails to deliver strong, steady growth. It points to recent margin contraction, likely linked to e-commerce expansion, and a lack of store growth as factors that have hurt overall EBITDA growth.

Under a more conservative scenario, JPMorgan’s sum-of-the-parts valuation could fall to around ₹1,100, assuming a 20 times EBITDA multiple for Retail and a 25% holding-company discount. Using peer multiples for Retail and a 35% holding-company discount produces a valuation of about ₹1,210.

In other words, the stock’s downside is less about the current O2C business and more about what multiple the market is willing to assign to Retail.

New Energy could provide the next catalyst

Reliance’s New Energy business is another part of the valuation that the market is currently treating cautiously.

The company has indicated that it expects to commission significant solar-cell and battery-cell and battery-packing lines by March 2027. JPMorgan also expects module installation in Kutch to begin after the monsoon.

In an earlier estimate, JPMorgan assigned a present value of about ₹160 per share to the New Energy business, assuming Reliance installs about 70 gigawatts of modules over the next four years.

Jefferies’ long-term framework includes a target of investing $10 billion in the renewable production chain over three years, covering solar photovoltaic, energy storage, green hydrogen electrolyser manufacturing and fuel cells.

But the value of the business depends on timely commissioning and the achievement of efficiencies. JPMorgan lists delays in the New Energy complex, a sharp fall in O2C margins and elevated debt from a weak earnings environment as key downside risks.

Free cash flow is the missing link

Reliance has operated with materially negative free cash flow for the past three years, according to JPMorgan, as it invested in Retail, New Energy and petrochemical capacity.

The brokerage expects that to change as the company’s EBITDA run rate approaches $20 billion a year. It forecasts positive free cash flow despite continued investment and notes that Reliance’s guidance to keep net debt-to-EBITDA below one time also points towards improving cash generation.

That improvement could help reduce the holding-company discount. But for now, the market appears to be waiting for proof that the investment cycle is translating into stronger cash flows and sustainable growth.

The market is therefore not necessarily missing Reliance’s refining recovery. It is discounting the durability of that recovery and demanding clearer evidence from Retail and New Energy.

Until those businesses deliver, strong O2C margins may support Reliance’s earnings without being sufficient to drive a decisive re-rating in the stock.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)