Reliance Power Q2 FY26: Profitability Returns But Legacy Concerns Persist

The quarter's financial performance reveals a company attempting to stabilise operations after years of turbulence. Net sales reached ₹1,974.03 crores in Q2 FY26, representing a 4.69% sequential increase from Q1 FY26's ₹1,885.58 crores and a 12.17% year-on-year improvement from Q2 FY25's ₹1,759.81 crores. This marks the first sustained revenue growth trajectory in recent quarters, though the company remains significantly below its FY24 peak quarterly revenues.

The return to profitability, whilst encouraging on the surface, masks deeper concerns about earnings quality and sustainability. The company's net profit of ₹87.32 crores in Q2 FY26, whilst dramatically higher than Q1 FY26's ₹44.68 crores, represents a 96.97% year-on-year decline from the exceptional ₹2,878.15 crores reported in Q2 FY25—a quarter that included significant one-time gains. This volatility in earnings underscores the challenge investors face in assessing the company's true operational performance.

Financial Performance: Margin Expansion Amidst Earnings Volatility

Reliance Power's Q2 FY26 financial performance demonstrates improving operational efficiency, with the operating profit margin (excluding other income) reaching 31.29%—the highest level in seven quarters. This represents a 132-basis-point sequential improvement from Q1 FY26's 29.97% and a substantial 993-basis-point expansion from Q2 FY25's 21.36%. The operating profit before depreciation, interest, and tax (excluding other income) stood at ₹617.67 crores, marking the highest quarterly figure in the trailing period.

However, the company's profitability remains heavily dependent on non-operating income, which contributed ₹93.07 crores in Q2 FY26—representing 86.02% of profit before tax. This high proportion of other income relative to operating profits raises concerns about the sustainability and quality of earnings. The profit before tax of ₹108.20 crores in Q2 FY26, whilst improved from Q1 FY26's ₹72.30 crores, reflects a business model still struggling to generate robust operating cash flows relative to its capital base.

The interest burden continues to weigh heavily on profitability, with interest expenses of ₹395.02 crores in Q2 FY26 consuming a significant portion of operating profits. Whilst this represents a sequential decline from Q1 FY26's ₹425.87 crores and a substantial reduction from Q2 FY25's ₹562.16 crores, the absolute level remains elevated. The operating profit to interest coverage ratio improved to 1.56 times in Q2 FY26—the highest in recent quarters—but still reflects a company with limited financial flexibility.

Depreciation charges of ₹207.52 crores in Q2 FY26 remained relatively stable, reflecting the capital-intensive nature of power generation. The effective tax rate of 19.30% in Q2 FY26 appears more normalised compared to the volatile tax charges of recent quarters, suggesting improved tax planning or settlement of past disputes. The net profit margin of 4.42% in Q2 FY26, whilst improved from Q1 FY26's 2.37%, remains modest for a capital-intensive infrastructure business and well below industry standards.

Operational Challenges: Weak Returns on Capital Employed

The fundamental challenge facing Reliance Power becomes starkly apparent when examining returns on capital. The company's average return on equity (ROE) stands at a mere 0.37%—amongst the weakest in the power sector and indicative of a business destroying shareholder value. This anaemic return reflects years of underperformance, high leverage, and operational difficulties that have plagued the company. The latest ROE of -0.91% suggests that even the recent return to quarterly profitability has not translated into meaningful shareholder returns.

Return on capital employed (ROCE) of 3.72% on average, with the latest reading at 3.93%, barely exceeds the risk-free rate and falls dramatically short of the company's weighted average cost of capital. For a capital-intensive power generation business, such low returns indicate either asset underutilisation, unfavourable power purchase agreements, or operational inefficiencies. The company's sales to capital employed ratio of just 0.23 times suggests that vast amounts of capital are required to generate relatively modest revenues—a troubling indicator of capital efficiency.

The balance sheet reveals a company still grappling with the legacy of aggressive expansion. Fixed assets of ₹31,858.57 crores as of March 2025 represent the bulk of the asset base, but these assets are generating inadequate returns. Current assets of ₹4,190.33 crores provide some liquidity cushion, though this is offset by current liabilities of ₹9,636.39 crores, resulting in negative working capital. The cash position of ₹439 crores as of March 2025, whilst down from ₹486 crores the previous year, remains modest relative to the debt burden.

The five-year sales compound annual growth rate (CAGR) of just 0.15% and EBIT growth of -10.04% underscore the structural challenges facing the business. These figures reflect a company that has failed to grow revenues meaningfully whilst simultaneously experiencing deteriorating operating profitability. The power sector has witnessed significant changes over this period, with increased competition, regulatory shifts, and changing fuel dynamics—factors that Reliance Power has struggled to navigate successfully.

Earnings Quality: Heavy Dependence on Non-Operating Income

A critical red flag in Reliance Power's financial profile is the disproportionate contribution of non-operating income to overall profitability. In Q2 FY26, other income of ₹93.07 crores constituted 86.02% of profit before tax—an unsustainably high proportion that calls into question the quality and repeatability of earnings. Whilst other income can include legitimate business activities such as treasury operations, dividend income, or gains from strategic investments, such heavy reliance suggests the core power generation business is barely profitable on a standalone basis.

This pattern is not isolated to Q2 FY26. Examining the trailing quarters reveals persistent dependence on other income to bridge the gap between operating profits and acceptable net income levels. In Q1 FY26, other income of ₹139.73 crores similarly played a crucial role in delivering profitability. The exceptional Q2 FY25 profit of ₹2,878.15 crores was largely driven by extraordinary gains, rather than sustainable operational improvements—a fact underscored by the subsequent quarters' more modest performance.

The tax rate volatility observed across quarters—ranging from -87.00% in Q4 FY25 to 38.20% in Q1 FY26, before normalising to 19.30% in Q2 FY26—adds another layer of complexity to earnings analysis. Such fluctuations suggest ongoing tax adjustments, settlements, or disputes that make forward earnings projections challenging. For investors seeking predictable cash flows and earnings, this volatility presents a significant obstacle to valuation confidence.

Industry Context: Navigating a Transforming Power Sector

The Indian power sector has undergone substantial transformation in recent years, with increased renewable energy penetration, competitive bidding for power purchase agreements, and regulatory reforms aimed at improving distribution company finances. Within this evolving landscape, Reliance Power's predominantly thermal power generation portfolio faces structural headwinds. The company's ability to secure favourable long-term power purchase agreements and maintain plant load factors will be critical determinants of future profitability.

Capacity utilisation and plant availability are key operational metrics for power generators, directly impacting revenue generation and unit economics. Whilst specific plant-level data is not disclosed in the quarterly results, the modest revenue growth relative to the installed capacity base suggests that either utilisation rates remain below optimal levels or realised tariffs are under pressure. The power sector's shift towards variable renewable energy sources has also increased volatility in merchant power prices, potentially impacting companies like Reliance Power that may have exposure to short-term markets.

Regulatory developments, including the implementation of late payment surcharge mechanisms and efforts to improve distribution company financial health, have broader implications for the sector. However, Reliance Power's elevated debt levels and modest profitability limit its ability to capitalise on potential sector improvements. The company's strategic positioning—focused primarily on thermal generation without significant renewable energy exposure—may prove challenging as India accelerates its clean energy transition and carbon reduction commitments.

The peer comparison reveals Reliance Power's competitive disadvantage across key metrics. With an ROE of 0.37% compared to the peer average of approximately 11%, the company trails significantly in capital efficiency. The price-to-book ratio of 1.04 times—below the peer average—reflects market scepticism about the company's ability to generate returns above its cost of capital. Notably, Reliance Power is the only major listed peer currently loss-making on a trailing twelve-month basis, unable to sustain a meaningful P/E multiple.

Valuation Analysis: Attractive Price Masks Fundamental Weakness

At the current market price of ₹40.18, Reliance Power trades at a price-to-book value of 1.04 times, slightly above its book value of ₹36.23 per share. This modest premium suggests the market harbours limited confidence in the company's ability to generate returns significantly above its cost of capital. The inability to assign a meaningful P/E ratio due to historical losses and volatile earnings further complicates traditional valuation approaches, forcing investors to rely on asset-based metrics and scenario analysis.

The enterprise value to EBITDA multiple of 15.42 times and EV to sales of 4.17 times appear elevated relative to the company's growth profile and return metrics. These multiples suggest the market is pricing in some expectation of operational improvement or asset monetisation, though the basis for such optimism remains unclear given the five-year track record of declining EBIT and stagnant revenues. The EV to capital employed ratio of 1.02 times indicates the market values the entire enterprise at approximately the capital invested—a neutral valuation that neither reflects value destruction nor creation.

The stock's 52-week range of ₹31.30 to ₹76.49 reflects significant volatility, with the current price 47.47% below the high and 28.37% above the low. This wide trading range underscores the uncertainty surrounding the company's prospects and the market's difficulty in establishing a stable valuation anchor. The absence of dividend payments—unsurprising given the company's profitability challenges—means investors derive no income yield and must rely entirely on capital appreciation for returns.

The valuation grade has fluctuated between "Fair" and "Attractive" in recent months, currently standing at "Fair" as of November 3, 2025. This oscillation reflects the tension between the low absolute price (suggesting value) and the weak fundamental performance (suggesting a value trap). The proprietary Mojo score of 34 out of 100, placing the stock in "SELL" territory, suggests that despite the apparently attractive valuation, the combination of poor quality, weak financial trends, and bearish technicals outweighs the price appeal.

Shareholding Pattern: Stable Promoter Stake, Modest Institutional Interest

The shareholding pattern reveals a company with stable promoter ownership but limited institutional enthusiasm. Promoter holding stood at 24.98% as of September 2025, unchanged from the previous quarter but up from 23.26% in March 2025. This increase reflects the conversion of warrants or preferential allotment rather than open market purchases, suggesting promoters are maintaining their stake through structured transactions rather than demonstrating conviction through secondary market buying.

Foreign institutional investor (FII) holding of 13.09% as of September 2025 represents a marginal increase from 12.93% in the previous quarter, suggesting cautious accumulation by some international investors. However, the absolute level remains modest for a company of this market capitalisation, indicating limited foreign investor conviction. The presence of 240 FII holders suggests broad but shallow interest, with no significant concentrated positions that might indicate strong institutional backing.

Mutual fund holding of just 0.72% as of September 2025, up slightly from 0.71% in the previous quarter, reflects the reluctance of domestic fund managers to take meaningful positions. With only 52 mutual funds holding stakes, and the aggregate position remaining below 1%, it is evident that professional domestic investors view the risk-reward profile as unattractive. This lack of institutional sponsorship limits potential demand and contributes to the stock's high volatility and beta of 1.35.

Insurance company holdings of 2.89% as of September 2025 show gradual accumulation, up from 2.75% in the previous quarter. However, the absolute level remains modest, suggesting insurance investors—typically long-term holders seeking stable returns—are not viewing Reliance Power as a core portfolio holding. The non-institutional shareholding of 58.18% as of September 2025 indicates significant retail investor participation, which can contribute to price volatility and speculative trading patterns.

Stock Performance: Significant Underperformance and Technical Weakness

Reliance Power's stock performance reveals a company that has dramatically underperformed both the broader market and its sector over most meaningful timeframes. Over the past month, the stock has declined 17.33% whilst the Sensex gained 0.92%, resulting in a negative alpha of 18.25 percentage points. The three-month performance shows an 8.33% decline against the Sensex's 3.29% gain, further widening the underperformance gap. This recent weakness has pushed the stock to trade near its 52-week low, with all key moving averages providing resistance.

The longer-term picture presents a more complex narrative. Over three years, the stock has delivered a remarkable 151.13% return against the Sensex's 34.73%, generating positive alpha of 116.40 percentage points. The five-year return of 1234.88% appears exceptional, vastly outperforming the Sensex's 90.99% gain. However, this long-term outperformance largely reflects recovery from extremely depressed levels rather than sustainable value creation, as evidenced by the ten-year return of -16.38%—a period over which the Sensex gained 221.87%.

The technical picture has deteriorated significantly, with the stock currently in a "Bearish" trend since November 3, 2025. The stock trades below all major moving averages—5-day (₹41.21), 20-day (₹44.36), 50-day (₹45.44), 100-day (₹51.46), and 200-day (₹47.24)—indicating comprehensive technical weakness. Key technical indicators including MACD, Bollinger Bands, and KST all flash bearish signals on both weekly and monthly timeframes, suggesting the downtrend may persist absent a fundamental catalyst.

The stock's high beta of 1.35 indicates it is 35% more volatile than the broader market, amplifying both gains and losses. This elevated volatility, combined with the current bearish technical setup, creates a challenging environment for investors. The risk-adjusted return of just 0.04 over the past year—compared to the Sensex's 0.38—demonstrates that the minimal absolute returns have come with disproportionately high volatility, resulting in poor risk-adjusted performance.

Investment Thesis: Quality Concerns Outweigh Valuation Appeal

The investment case for Reliance Power rests on a tension between apparent valuation attractiveness and fundamental quality concerns. The proprietary Mojo score of 34 out of 100 places the stock firmly in "SELL" territory, reflecting the algorithm's assessment that quality and trend factors outweigh valuation considerations. The four-pillar analysis reveals a company with mixed near-term drivers (positive financial trend offset by bearish technicals), below-average quality, attractive valuation, but an overall negative assessment.

The quality grade of "Below Average" reflects the company's long-term financial performance, characterised by a five-year EBIT CAGR of -10.04%, average ROCE of just 3.72%, and elevated debt to EBITDA of 10.25 times. These metrics indicate a business that has destroyed value over the medium term and lacks the financial strength to weather adverse conditions. The absence of dividend payments and minimal institutional holdings further underscore professional investors' lack of confidence in the company's prospects.

The financial trend, whilst currently classified as "Positive" based on Q2 FY26 results, remains fragile. The improvement is largely margin-driven rather than volume-driven, and the heavy dependence on other income raises questions about sustainability. The company's ability to maintain operating margins above 30% whilst simultaneously growing revenues and reducing dependence on non-operating income will be critical to sustaining the positive trend classification.

From a technical perspective, the bearish trend and positioning below all major moving averages suggest the path of least resistance remains downward. The stock would need to reclaim the 20-day moving average at ₹44.36 and subsequently the 50-day at ₹45.44 to signal any meaningful technical reversal. Until such time, the technical setup favours sellers over buyers, with immediate support visible only at the 52-week low of ₹31.30.

Key Strengths and Risk Factors

Outlook: Critical Monitoring Points for Investors

The outlook for Reliance Power remains clouded by structural challenges that transcend quarterly fluctuations. Whilst the recent return to profitability and margin improvement provide some cause for optimism, the fundamental issues of weak returns on capital, elevated leverage, and stagnant long-term growth persist. The company's ability to sustain current profitability levels whilst simultaneously reducing debt and improving capital efficiency will determine whether this represents a genuine turnaround or merely a temporary respite.

Investors should closely monitor the composition of earnings in coming quarters, particularly the proportion of other income to operating profits. A sustainable business model requires operating profits to be the primary driver of net income, rather than non-operating sources. Additionally, the company's success in securing new power purchase agreements, improving plant load factors, and managing fuel costs will be critical operational indicators.

The broader power sector dynamics, including regulatory changes, renewable energy transition impacts, and distribution company financial health, will also influence Reliance Power's prospects. The company's predominantly thermal generation portfolio may face increasing headwinds as India accelerates its clean energy commitments, potentially requiring significant capital investments in cleaner technologies or portfolio diversification—investments that the current balance sheet is ill-equipped to fund.