The stock of Reliance Industries (RIL) crashed nearly 9 per cent on Monday to ₹1,877, and fell another 1.5 per cent on Tuesday to ₹1,849. This seems attributable to three reasons.

PAT at sub ₹10,000-cr

One - market disappointment over the company’s September 2020 quarter results. RIL’s consolidated profit (attributable to owners of the company) of ₹9,567 crore was about 15 per cent lower y-o-y and 28 per cent lower compared with the June 2020 quarter. That the consolidated profit was below the psychological level of ₹10,000 crore might have unsettled some. But this was due to the far higher share of minority interest (₹1,035 crore) in the September 2020 quarter compared with the September 2019 quarter (₹90 crore) and the June 2020 quarter (₹15 crore).

The higher share of minority interest is primarily due to the stake sale of about 33 per cent in Jio Platforms in the past few months. That the digital business (Jio) was the largest profit contributor in the recent September quarter accentuated the difference between pre-minority and post-minority profit. The total consolidated profit (before minority interest) in the September 2020 quar te r is ₹10,602 crore, down about 7 per cent y-o-y and 20 per cent compared with the June 2020 quarter. On a y-o-y basis, only the digital segment’s operating profit grew while that of the petrochemicals, refining and retail segments fell.

Exceptional gain

Two – a weak sequential quarter performance (September 2020 over June 2020) by RIL in contrast to many other companies that have recovered well with the unlocking of the economy. But this was due to an exceptional gain in the June 2020 quarter, of ₹4,966 crore due to profit on divestment of shares of Reliance BP Mobility Services.

Adjusted for this, RIL’s consolidated profit (attributable to shareholders) in the September 2020 quarter is about 16 per cent higher compared with the June 2020 quarter.

Catching up with valuation

Three – disappointment in the performance of a stock priced-to-perfection. The RIL stock has had a stupendous run since end-March. From a low of ₹884 on March 23 this year, the stock rocketed to over ₹2,300 in September 2020 - thanks to the mega stake sale deals in Jio Platforms, the big-ticket rights issue, the recent major stake sales in Reliance Retail, and the announcement of Reliance Retail buying the chunk of Future’s business.

The valuation (price to trailing 12 month earnings) of the RIL stock shot up to over 30 times, far higher than its three-year average of about 20 times. At these levels, there was little room for bad news. So, the news of the Reliance – Future Retail deal being stayed by an emergency arbitrator in Singapore in the tussle with Amazon saw the RIL stock lose ground over the past week. Add to this the market disappointment with the company’s September quarter results, and the RIL stock fell off the cliff.

Even after the crash, the RIL stock trades at close to 30 times.

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