Reliance Power Q3 FY26: Profit Plunges 71% as High Tax Rate Erodes Gains

The stock, currently trading at ₹28.26, has declined 18.89% year-to-date and remains in a confirmed bearish technical trend since early November 2025. With the company grappling with weak return ratios—an ROE of just 0.49% and ROCE of 3.58%—and elevated debt levels, the quarter's results underscore persistent challenges in translating operational gains into shareholder value.

Financial Performance: Operational Strength Masked by Tax Burden

Reliance Power's Q3 FY26 revenue stood at ₹1,872.84 crores, registering modest growth of 1.08% year-on-year but declining 5.13% sequentially from Q2 FY26's ₹1,974.03 crores. The quarter-on-quarter revenue dip reflects typical seasonal variations in power demand, though the company maintained its position above the ₹1,850 crore mark for the third consecutive quarter.

Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) reached ₹604.32 crores in Q3 FY26, translating to an operating margin of 32.27%—the highest in the past seven quarters. This represented a sequential improvement of 98 basis points from Q2 FY26's 31.29% and a substantial 572 basis points expansion compared to Q3 FY25's 26.55%. The margin expansion signals improving operational efficiency and better cost management across the company's power generation assets.

However, the profit trajectory tells a dramatically different story. Profit before tax for Q3 FY26 stood at ₹100.13 crores, down marginally from ₹108.20 crores in Q2 FY26. What devastated the bottom line was an extraordinarily high tax charge of ₹75.02 crores—representing a tax rate of 74.92%. This compares starkly with Q2 FY26's more normalised tax rate of 19.30%. The abnormal tax incidence appears related to adjustments or provisions, as the company's historical tax rates have been volatile and often negative in loss-making periods.

Interest costs continued their downward trajectory, declining to ₹371.26 crores in Q3 FY26 from ₹395.02 crores in Q2 FY26 and ₹544.16 crores in Q3 FY25. This 31.76% year-on-year reduction in interest burden reflects the company's ongoing deleveraging efforts, with long-term debt declining to ₹10,259.07 crores in FY25 from ₹12,240.36 crores in FY23. Depreciation remained relatively stable at ₹209.87 crores.

Operational Challenges: Weak Returns Despite Margin Gains

Despite the encouraging operating margin expansion, Reliance Power continues to struggle with fundamental profitability metrics that reflect structural challenges in its business model. The company's return on equity (ROE) averaged a mere 0.49% over recent periods, with the latest reading at 1.81%—far below acceptable thresholds for a capital-intensive power generation business. This anaemic ROE indicates the company is generating minimal returns on the substantial shareholder capital deployed in its operations.

Return on capital employed (ROCE) paints an equally concerning picture at an average of 3.58%, with the latest figure at 4.78%. For context, a healthy power company typically delivers ROCE in the double digits. The weak ROCE reflects both modest operating profits relative to the asset base and the burden of legacy debt, even as the company has made progress in debt reduction.

The company's balance sheet shows shareholder funds of ₹16,337.18 crores as of March 2025, up from ₹11,613.86 crores in March 2024, primarily driven by the FY25 profit of ₹2,947 crores. However, this profit appears inflated by one-off items, as evidenced by the subsequent quarterly performance. Fixed assets stood at ₹31,858.57 crores, whilst current assets of ₹4,190.33 crores were offset by current liabilities of ₹9,636.39 crores, indicating working capital pressures.

Cash flow from operations remained robust at ₹1,937 crores for FY25, demonstrating that the core power generation business continues to generate cash despite profitability challenges. However, this was largely consumed by financing activities totalling ₹2,434 crores, predominantly debt servicing. The company's closing cash position stood at ₹439 crores in FY25, down from ₹486 crores in FY24.

Industry Context: Underperforming in a Recovering Sector

The Indian power sector has witnessed a gradual recovery over the past year, with improved plant load factors, better coal availability, and rising electricity demand. The broader Power sector index delivered returns of 4.69% over the past year, reflecting renewed investor confidence in the space. However, Reliance Power has significantly underperformed this sectoral trend, with its stock declining 26.96% over the same period—an underperformance of 31.65 percentage points.

This divergence reflects investor concerns about the company's specific challenges: weak return metrics, high leverage, earnings volatility, and execution risks at its various power projects. Whilst peers with stronger balance sheets and operational track records have benefited from the sectoral tailwinds, Reliance Power has struggled to capitalise on the improving environment.

The peer comparison reveals Reliance Power's valuation anomaly. Despite sporting the weakest ROE in the peer group at 0.49%—compared to an average of approximately 12% for comparable companies—Reliance Power trades at a P/E ratio of 39.02 times, significantly higher than peers like NLC India (13.75x) and CESC (13.69x). The only peer with a higher P/E is SJVN at 51.15x, but SJVN delivers a substantially superior ROE of 7.94%.

Reliance Power's price-to-book ratio of 0.71 times appears attractive on the surface, trading at a 29% discount to book value. However, this discount is justified given the poor return on that book value. In contrast, Torrent Power commands a 3.71 times P/BV multiple, reflecting its 16.64% ROE and consistent dividend payments. The market is clearly differentiating between quality power companies and those struggling with profitability.

Valuation Analysis: Discount Reflects Fundamental Weakness

At the current market price of ₹28.26, Reliance Power trades at a P/E ratio of 39.02 times trailing twelve-month earnings, an elevated multiple that appears incongruous with the company's weak fundamentals. This high P/E is partly a mathematical artefact of the low absolute profit base—small changes in earnings can cause dramatic P/E fluctuations. The industry average P/E of 20 times suggests Reliance Power trades at a 95% premium to sector valuations, despite delivering inferior returns.

The EV/EBITDA multiple of 11.12 times and EV/EBIT of 17.56 times reflect the market's scepticism about the sustainability and quality of earnings. The EV/Sales ratio of 3.28 times indicates that investors are paying ₹3.28 for every rupee of revenue, a premium that seems unjustified given the company's margin volatility and profitability challenges.

The stock's valuation grade has oscillated between "Attractive" and "Fair" over the past few months, currently sitting at "Fair" as of November 2025. However, this assessment must be tempered by the recognition that even "fair" valuation doesn't necessarily mean "good investment" when fundamentals are structurally weak. The PEG ratio of 0.34 suggests the stock might be undervalued relative to growth expectations, but this metric is unreliable given the negative five-year EBIT growth rate of -7.14%.

Shareholding Pattern: Institutional Caution Evident

The shareholding structure of Reliance Power reveals a company with limited institutional support and a relatively stable but modest promoter stake. As of December 2025, promoter holding stood at 24.98%, unchanged for three consecutive quarters after increasing from 23.26% in March 2025. The promoter group, led by Reliance Infrastructure Limited with a 24.90% stake, has maintained its commitment without further increases, suggesting neither aggressive accumulation nor exit intentions.

Foreign institutional investors (FIIs) hold 13.25% as of December 2025, showing marginal sequential increases of 0.16% in both Q3 and Q2 FY26. Whilst this represents some foreign interest, the absolute level remains modest compared to better-quality power sector peers. The presence of 230 FIIs suggests diversified foreign participation rather than concentrated conviction bets.

Mutual fund holdings paint a concerning picture, declining to just 0.46% in Q3 FY26 from 0.72% in Q2 FY26—a reduction of 26 basis points. This decrease, representing outflows by domestic institutional investors who typically take long-term fundamental views, signals waning confidence amongst professional money managers. With only 54 mutual funds holding positions, the stock lacks broad-based institutional support.

Insurance companies hold 2.51%, down from 2.89% in the previous quarter, indicating another category of institutional investors reducing exposure. The non-institutional and retail segment comprises 58.70% of the shareholder base, up slightly from 58.18% in Q2 FY26, suggesting the stock remains predominantly retail-driven—a characteristic often associated with higher volatility and sentiment-driven price movements.

Stock Performance: Severe Underperformance Across Timeframes

Reliance Power's stock performance has been dismal across most meaningful time horizons, significantly underperforming both the broader market and its sector peers. Trading at ₹28.26 as of January 30, 2026, the stock has declined 18.89% year-to-date in just one month, compared to the Sensex's 3.46% decline—generating a negative alpha of 15.43 percentage points.

The recent performance has been particularly brutal. Over the past three months, the stock has plummeted 39.29%, destroying nearly 40% of shareholder wealth whilst the Sensex declined just 2.53%. The six-month return of -47.10% represents a near-halving of the stock price from its July 2025 levels around ₹54. The stock hit a 52-week high of ₹76.49 but has since collapsed 63.05% to current levels, now trading just 5.33% above its 52-week low of ₹26.83.

Over a one-year period, Reliance Power has declined 26.96% whilst the Sensex gained 7.18%—a staggering 34.14 percentage point underperformance. This divergence reflects the market's loss of confidence in the company's ability to deliver sustainable profitability. The stock also underperformed its sector, delivering -26.96% returns compared to the Power sector's 4.69% gain—an underperformance of 31.65 percentage points.

Interestingly, longer-term returns paint a different picture. The three-year return of 125.36% and five-year return of 753.78% reflect the stock's recovery from extremely depressed levels in 2020-2021. However, these historical gains provide little comfort to investors who entered positions over the past 12-18 months and are now sitting on substantial losses. The ten-year return of -44.21% versus the Sensex's 230.79% gain underscores the long-term value destruction this stock has inflicted on shareholders.

Technical Analysis: Confirmed Bearish Trend with Limited Support

From a technical perspective, Reliance Power remains entrenched in a bearish trend that commenced on November 3, 2025, at ₹43.90. All major technical indicators are flashing red signals. The stock trades below all key moving averages—5-day (₹28.59), 20-day (₹32.28), 50-day (₹35.19), 100-day (₹40.10), and 200-day (₹46.61)—a classic bearish configuration indicating sustained selling pressure and lack of buying interest.

The MACD indicator shows bearish signals on both weekly and monthly timeframes, whilst Bollinger Bands indicate the stock is in bearish territory on both horizons. The KST oscillator, Dow Theory, and On-Balance Volume (OBV) all point to bearish or mildly bearish conditions, creating a unanimous negative technical picture. The RSI shows no clear signal, suggesting the stock is neither oversold nor overbought—essentially stuck in a downtrend without immediate reversal catalysts.

Immediate support lies at the 52-week low of ₹26.83, a level that's dangerously close to the current price of ₹28.26. A breach of this support could trigger further technical selling and stop-loss triggers. On the upside, immediate resistance sits at the 20-day moving average of ₹32.28, followed by major resistance at the 100-day moving average of ₹40.10. The 200-day moving average at ₹46.61 and the 52-week high at ₹76.49 represent distant resistance levels that would require a fundamental re-rating to reach.

Investment Thesis: Multiple Red Flags Outweigh Positives

The investment case for Reliance Power presents a challenging picture dominated by structural weaknesses that overshadow any potential positives. The company's Mojo Score of 29 out of 100 places it firmly in "Strong Sell" territory, reflecting the confluence of negative factors across valuation, quality, financial trends, and technicals.

Whilst the short-term financial trend turned positive in December 2025, driven by improved operating margins and better debt-equity ratios, this improvement has not translated into sustainable bottom-line profitability. The Q3 FY26 results, with their 71% profit decline due to abnormal tax rates, underscore the volatility and unpredictability of earnings—a major concern for investors seeking stable returns.

The company's quality grade of "Below Average" reflects its weak long-term financial performance, with five-year sales growth of just -0.41% and five-year EBIT growth of -7.14%. These negative growth trajectories indicate the business is shrinking rather than expanding, raising serious questions about the viability of the long-term investment case. The average ROCE of 3.58% and ROE of 0.49% are simply inadequate for a capital-intensive business, suggesting the company is destroying rather than creating value.

Outlook: What to Watch