What should investors consider before investing in Reliance shares?

What should investors consider before investing in Reliance shares?

Reliance Industries Limited is the largest Indian conglomerate with a market capitalisation of Rs. 1.78 lakh crore. The company has exposure to several industries, including oil refining and marketing, petrochemicals, exploration, retail, and digital services. RIL has a market-leading position in all these industries, which adds to its attractiveness as a good investment opportunity. 

 

However, the company also faces some challenges with geopolitical tensions impacting its oil business, lower returns than competitors, and reduced promoter shareholding over the years.

 

Positives

 

Technical analysis

 

Overall, the current technical scenario of the RIL share price shows a positive bias with the possibility of a movement towards a target of Rs. 2,725, which is the 80% retracement level from its June 2022 decline. The following reasons contribute to the positive bias:

 

  • The Reliance share price currently stands at Rs. 2,642 and has received significant support at the 2,370-2,400 levels. 
  • Based on momentum indicators, the stock has been in oversold territory, and the current uptick in its price is likely to sustain soon. 
  • Reliance share has seen significant buying close to the 52 weeks EMA in the past, which currently stands at 2,565. This provides some degree of safety to the traders and investors of RIL in the shortterm.

 

Strong business performance across verticals

 

RIL has a significant presence across sectors ranging from retail to digital services in India. Most of these businesses cansignificantly grow their revenues and profits in recent quarters. Further, these businesses are expected to continue this trajectory in the upcoming years. Some important highlights:

 

  • In Q1 FY23, RIL could register the best quarterly EBITDA on a consolidated basis at Rs. 40,179 crore, registering a 45.8% growth YoY.
  • The average revenue per user in its digital services business is expected to grow at a 15% CAGR in FY22-24.
  • With a focus on boosting customer experience with its retail brands, Reliance Retail is expected to increase its EBITDA at a 40% CAGR in FY22-24.
  • Favourable oil prices are expected to increase EBITDA from oil exploration by 74% CAGR in FY22-24.
  • In the oil business, which forms most of the company’s revenue and profit, enhancements in gross refining margins are expected to free up significant amounts of cash for reinvestment into other ventures.

 

Improvement in operational efficiency

 

The company could use its capital and assets more efficiently in the past few years and increase its Return on Assets over the past two years.

 

Negatives

 

Geopolitical risks

 

As highlighted by the group chairman Mr. Mukesh Ambani, geopolitical conflicts have caused significant global problems in the energy markets. While the company has navigated exceptionally well through these disruptions, risks in the future have the potential to impact the company’s performance and, as a result, the RIL share.

 

Lower returns than competitors

 

The company is improving its operational efficiency and has increased its RoA. However, the return on capital employed and return on equity for the company have been lower than competitors at 9.36% and 9.17%, respectively. These numbers for competitors such as HPCL and BPCL are higher than the ones for RIL.

 

Reducing promoter shareholding

 

Over the past few years, the company’s investmenthas resulted in stake dilution from the promoters. This might impact the general investor sentiment negatively.

 

Conclusion: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: [email protected] Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.