Reliance Industries Q2 FY26: Retail Strength Masks Refining Weakness as Profit Jumps 11.49%

The September quarter results paint a nuanced picture for India's most valuable company. Whilst top-line growth remained robust at 9.97% year-on-year, reaching ₹2,54,623 crores, the sequential decline in profitability raises questions about near-term earnings momentum. The company's operating profit margin excluding other income improved to 18.02%, marking a 115 basis point expansion year-on-year, suggesting operational efficiency gains despite headwinds in certain segments.

The sharp quarter-on-quarter profit decline of 32.25% stands in stark contrast to the previous quarter's exceptional performance, when consolidated net profit had surged 39.84% to ₹26,892 crores. This volatility underscores the cyclical nature of Reliance's refining and petrochemicals businesses, which remain sensitive to global commodity price movements and demand fluctuations.

Financial Performance: Growth Momentum Moderates

Reliance Industries' Q2 FY26 financial performance reveals a company navigating through a transitional phase. Net sales of ₹2,54,623 crores represented healthy year-on-year growth of 9.97%, accelerating from the 5.11% growth recorded in Q1 FY26. The sequential improvement of 4.51% quarter-on-quarter suggests recovering demand across key business segments, particularly in retail and digital services.

Operating profit before depreciation, interest, and tax (excluding other income) reached ₹45,885 crores, marking the highest quarterly figure in the company's recent history. This represents a substantial 17.48% year-on-year increase and a 6.95% sequential improvement. The operating margin expansion to 18.02% from 16.87% in the year-ago quarter demonstrates improving operational leverage and cost management initiatives bearing fruit.

However, the quality of earnings warrants closer examination. Other income declined dramatically to ₹4,482 crores in Q2 FY26 from ₹15,119 crores in the previous quarter, contributing significantly to the sequential profit decline. This volatility in other income, which includes treasury income, dividends, and gains from investments, highlights the importance of focusing on core operational performance rather than one-time gains.

The net profit margin of 8.70% in Q2 FY26, whilst an improvement from the 8.25% recorded in Q2 FY25, represents a significant compression from the 12.59% margin achieved in Q1 FY26. This normalisation was largely driven by the reversal of exceptional other income that had boosted the previous quarter's profitability.

Interest costs remained relatively stable at ₹6,827 crores, representing a modest increase from ₹6,017 crores in Q2 FY25, reflecting the company's disciplined capital structure management despite ongoing expansion initiatives. Depreciation charges increased to ₹14,416 crores from ₹12,880 crores year-on-year, in line with the company's substantial capital expenditure programme across its digital infrastructure, retail expansion, and new energy ventures.

Balance Sheet Strength: Fortress Balance Sheet Intact

Reliance Industries maintains one of the strongest balance sheets in Indian corporate history, with shareholder funds of ₹8,43,200 crores as of March 2025, up from ₹7,93,481 crores in the previous year. This represents a robust equity base supporting the company's ambitious growth plans across multiple sectors. The company's book value per share stands at ₹623.12, providing a solid foundation for long-term value creation.

The company's debt management deserves particular attention. With total long-term debt of ₹2,36,899 crores and a net cash position of negative ₹2,25,211 crores (meaning the company holds more cash than debt), Reliance maintains exceptional financial flexibility. The debt-to-equity ratio of just 0.16 positions the company amongst the most conservatively leveraged large corporations in India, providing ample headroom for future investments without compromising financial stability.

Return on equity, however, presents a more nuanced picture. At 8.26% for the latest quarter, Reliance's ROE trails behind some of its diversified conglomerate peers and remains below the company's historical averages. The five-year average ROE of 7.83% suggests that despite the company's massive scale and market leadership, capital efficiency remains an area requiring management focus. For a company of Reliance's stature and ambitions, investors would ideally prefer to see ROE in double digits, reflecting more efficient deployment of the substantial shareholder capital.

The company's return on capital employed (ROCE) of 11.37% in the latest period, whilst representing an improvement over the five-year average of 9.80%, similarly suggests room for enhancement. As Reliance's newer ventures in telecom, retail, and renewable energy scale up and achieve operational maturity, these return metrics should theoretically improve, but the timeline remains uncertain.

Segment Dynamics: Diverging Business Trajectories

Reliance's diversified business model, spanning oil-to-chemicals, retail, digital services, and emerging new energy ventures, creates both opportunities and challenges. The traditional oil and gas business, which built the Reliance empire, continues to generate substantial cash flows but faces structural headwinds from the global energy transition and volatile refining margins.

The company's five-year sales compound annual growth rate (CAGR) of 13.11% reflects the successful diversification strategy, with newer businesses like Reliance Retail and Jio Platforms contributing an increasingly larger share of revenues. The EBIT growth CAGR of 14.02% over the same period demonstrates improving profitability mix as higher-margin consumer businesses scale up.

Operating leverage appears to be improving, with the operating margin (excluding other income) expanding consistently over recent quarters. The 18.02% margin in Q2 FY26 represents one of the highest levels in recent years, suggesting that the company's scale advantages and operational efficiencies are beginning to manifest more visibly in the financial statements.

Peer Comparison: Premium Valuation Under Scrutiny

Reliance Industries commands a significant valuation premium over its peers in the oil exploration and refining sector, reflecting its unique positioning as a diversified conglomerate rather than a pure-play energy company. However, this premium warrants careful examination in light of recent performance trends and comparative metrics.

At a trailing twelve-month price-to-earnings ratio of 23.53x, Reliance trades at nearly triple the sector average of approximately 10x. This premium reflects market expectations of higher growth from the company's retail and digital businesses, which are valued on consumer sector multiples rather than commodity-linked energy sector multiples. However, the premium becomes harder to justify when examining return metrics.

Reliance's return on equity of 8.26% actually trails the sector average of approximately 12%, with peers like Bharat Petroleum delivering ROE of 16.73% and ONGC posting 12.32%. This disconnect between valuation premium and return metrics suggests that investors are paying for future potential rather than current performance, a bet that requires sustained execution excellence to validate.

The price-to-book ratio of 2.27x similarly commands a premium, approximately 60% higher than the sector average. Whilst Reliance's superior balance sheet quality and diversification justify some premium, the magnitude appears stretched relative to current return generation. The company's minuscule dividend yield of 0.39% compares unfavourably with sector peers offering yields of 2-5%, reflecting management's preference to reinvest cash flows into growth initiatives rather than return capital to shareholders.

Valuation Analysis: Fair Value with Limited Margin of Safety

At the current market price of ₹1,416.95, Reliance Industries trades at what can best be characterised as fair value with limited margin of safety for new investors. The stock's trailing twelve-month P/E ratio of 23.53x appears reasonable for a diversified conglomerate with significant growth optionality, but offers little room for disappointment given the company's modest current returns on equity and capital.

The PEG ratio of 1.27x suggests the stock is reasonably priced relative to its growth prospects, with the five-year sales CAGR of 13.11% providing some justification for the premium valuation. However, this metric assumes that historical growth rates will continue, an assumption that becomes increasingly challenging as the company's base expands and newer ventures mature.

Enterprise value multiples provide additional context. The EV/EBITDA ratio of 12.16x positions Reliance at a moderate premium to industrial averages but below many fast-growing consumer companies. The EV/Sales ratio of 2.11x reflects the market's recognition of the company's improving business mix, with higher-margin retail and digital services contributing an increasing share of revenues.

The stock's 52-week range of ₹1,115.55 to ₹1,551.00 provides perspective on recent volatility. Trading approximately 8.64% below its 52-week high and 27.02% above its 52-week low, the current price sits in the middle-to-upper portion of the recent range, suggesting limited immediate upside potential without a positive catalyst or earnings surprise.

Technical indicators present a mixed picture. The stock recently shifted to a mildly bullish trend on 16th October 2025 at ₹1,398.30, representing a modest 1.33% gain since the trend change. However, the stock remains below its 100-day moving average of ₹1,418.94, suggesting that the recent rally may face resistance at current levels.

Shareholding Pattern: Institutional Confidence Builds Gradually

Reliance Industries' shareholding pattern reveals gradual but steady institutional accumulation, suggesting growing confidence in the company's long-term prospects despite near-term performance volatility. The promoter holding of 50.07% as of June 2025 remains stable, with only marginal dilution of 0.04% quarter-on-quarter, indicating the Ambani family's continued commitment to the business.

Foreign institutional investors increased their stake by 0.15% quarter-on-quarter to 19.21%, reversing the declining trend observed in previous quarters when FII holding had dropped from 21.29% in September 2024. This uptick suggests renewed interest from global investors, possibly reflecting confidence in India's growth story and Reliance's positioning within it.

Domestic mutual funds continued their steady accumulation, raising holdings by 0.11% to 9.32%. More significantly, insurance companies increased their stake by 0.19% to 9.18%, marking the largest quarterly increase amongst institutional categories. This sustained buying by long-term domestic institutional investors provides a stable shareholder base and suggests confidence in the company's strategic direction.

The number of foreign institutional investors holding the stock increased to 1,796 from 1,760, indicating broader international participation. Similarly, mutual fund participation expanded to 90 schemes from 89, though insurance company participation marginally declined to 44 from 46. The substantial reduction in non-institutional shareholders from 4,763,434 to 4,433,429 suggests some retail profit-booking, possibly after the stock's strong year-to-date performance.

Notably, promoter pledging remains at zero, eliminating any concerns about financial stress or governance issues. Total institutional holdings of 39.10% provide a solid foundation of sophisticated, long-term investors who typically conduct thorough due diligence before committing capital.

Stock Performance: Modest Returns Mask Volatility

Reliance Industries' stock performance over the past year presents a picture of modest absolute returns but significant relative underperformance compared to broader market indices and historical standards. The stock has delivered a one-year return of just 4.44%, marginally outperforming the Sensex's 3.64% gain but significantly lagging the company's own historical performance and investor expectations.

The year-to-date performance of 16.58% appears more impressive, outperforming the Sensex by 9.14 percentage points. However, this strong start to the calendar year has been followed by consolidation, with the stock declining 4.07% over the past three months whilst the broader market advanced 2.06%. This recent underperformance of 6.13% suggests that investors have grown increasingly cautious about near-term earnings visibility.

Over longer time horizons, the underperformance becomes more pronounced. The two-year return of 20.30% trails the Sensex's 26.38% gain by 6.08 percentage points, whilst the three-year return of 28.99% significantly lags the Sensex's 43.73% advance. This sustained underperformance over multiple time periods suggests structural challenges rather than temporary headwinds.

The stock's beta of 1.00 indicates it moves in line with the broader market, neither amplifying nor dampening market movements. This medium-beta characteristic suggests that Reliance has transitioned from a high-growth, high-volatility stock to a more mature, market-correlated investment, reflecting its evolution into India's largest and most diversified conglomerate.

Risk-adjusted returns provide additional context. The stock's one-year risk-adjusted return of 0.22 compares unfavourably with the Sensex's 0.29, suggesting that investors have not been adequately compensated for the volatility inherent in holding the stock. The volatility of 20.12% significantly exceeds the Sensex's 12.54%, indicating that Reliance carries substantially higher risk than the broader market despite its large-cap status.

Quality Assessment: Average Quality Persists

Reliance Industries carries an "Average" quality grade that has persisted for eight consecutive quarters since September 2023, representing a downgrade from the "Good" quality status maintained from June 2023 to June 2025. This quality assessment reflects a balanced evaluation of the company's financial metrics, growth trajectory, and operational characteristics.

The company's five-year sales CAGR of 13.11% and EBIT CAGR of 14.02% demonstrate healthy long-term growth, particularly impressive given the company's massive scale. However, the return metrics tell a more sobering story. The average return on equity of 7.83% and average return on capital employed of 9.80% fall short of the double-digit returns that would characterise a truly high-quality compounder.

On the positive side, Reliance's financial strength remains unquestionable. The average debt-to-EBITDA ratio of 2.52 indicates moderate leverage, whilst the net debt-to-equity ratio of 0.16 (with the company actually in a net cash position) provides exceptional financial flexibility. The interest coverage ratio averaging 4.69x offers comfortable cushion for debt servicing, though this metric has declined from historical highs as the company has increased borrowings to fund expansion.

The company's tax ratio averaging 21.60% appears reasonable and in line with corporate tax rates, whilst the dividend payout ratio of 9.72% reflects management's preference to retain cash for growth investments rather than distribute it to shareholders. The absence of any promoter pledging and high institutional holdings of 39.11% provide additional quality markers, indicating sophisticated investor confidence in the business.

Financial Trend: Flat Trajectory Raises Concerns

Reliance's short-term financial trend classification as "Flat" for five consecutive quarters since June 2024 represents a concerning departure from the "Positive" trend that characterised the March 2024 quarter. This flattening trend suggests that the company's financial performance has plateaued, lacking the consistent quarter-over-quarter improvement that markets reward with premium valuations.

The trend analysis reveals both strengths and weaknesses. On the positive side, operating profit (PBDIT) in Q2 FY26 reached its highest level at ₹45,885 crores, and profit before tax excluding other income similarly peaked at ₹24,642 crores. These metrics suggest that the core business operations continue to strengthen, with improving margins and operational efficiency.

However, the negative factor weighing on the trend assessment is significant: consolidated net profit of ₹18,165 crores (using the quarterly PAT figure) has fallen 10.9% compared to the previous four-quarter average. This decline in bottom-line profitability, despite improving top-line and operating metrics, raises questions about the sustainability of earnings growth and the impact of non-operational factors on reported profits.

The persistence of a flat trend for five consecutive quarters suggests that Reliance is navigating through a transitional phase where legacy businesses face headwinds whilst newer ventures have yet to contribute meaningfully to profitability. For the trend to turn positive again, the company needs to demonstrate consistent quarter-over-quarter improvement in both revenue and profitability metrics, particularly at the net profit level.

Outlook: What Lies Ahead for India's Largest Conglomerate

Reliance Industries stands at a critical juncture in its evolution from an energy-focused conglomerate to a diversified consumer and technology powerhouse. The company's outlook hinges on the successful execution of its ambitious transformation strategy, with newer businesses in retail, digital services, and renewable energy needing to demonstrate sustainable profitability to justify the company's premium valuation.

The near-term trajectory will likely be characterised by continued volatility in reported earnings as the traditional oil-to-chemicals business navigates cyclical headwinds whilst growth investments in newer ventures continue to consume capital without proportionate near-term returns. Management's ability to balance cash generation from mature businesses with disciplined capital allocation to growth opportunities will be crucial.

Key monitoring points for investors include quarterly margin trends in the refining and petrochemicals business, subscriber additions and average revenue per user (ARPU) trends in Jio Platforms, same-store sales growth and profitability improvement in Reliance Retail, and progress on the renewable energy roadmap including green hydrogen and solar manufacturing capabilities.

The company's strong balance sheet and cash generation capabilities provide a cushion to weather near-term challenges and continue investing in long-term growth opportunities. However, investors must recognise that the transformation from a commodity-linked business to a consumer-facing conglomerate is a multi-year journey that will likely feature periods of earnings volatility and return pressure before the benefits fully materialise.