Three reasons why the RIL stock crashed on Monday

BL Research Bureau

The stock of market behemoth Reliance Industries (RIL) crashed nearly 9 per cent on Monday to ₹1,877. This sharp fall seems to be attributable to three reasons.

One - market disappointment over the company’s September 2020 quarter results that was declared after market hours last Friday. 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 investors. But this was due to the far higher share of a 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 a minority interest in the recent quarter 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 effect of the difference between pre-minority and post-minority profit. The total consolidated profit (before minority interest) in the September 2020 quarter 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 all fell.

 

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 primarily due to an exceptional gain in the June 2020 quarter, of ₹4,966 crore due to profit on the 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.

 

Three – disappointment in the performance of a stock priced to perfection. The RIL stock has had a stupendous run since end-March and seems priced-to-perfection, with no room for disappointments — real or perceived. From its peak of ₹1,610 in mid-December 2019, the RIL stock had crashed to ₹884 on March 23 this year. But since then, the stock rocketed to over ₹2,300 in September 2020 - thanks to the rapid, 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 Retail’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, the bad news was poorly taken. 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 recent September quarter results, and the RIL stock fell off the cliff on Monday. Even after Monday’s crash, the RIL stock trades at close to 30 times.