Reliance Industries Downgraded to Sell Amid Technical Weakness and Flat Financials

Technical Trends Turn Bearish

The most significant catalyst for the downgrade is the change in the technical grade from mildly bullish to mildly bearish. Key technical indicators on weekly and monthly charts have weakened, signalling a shift in market sentiment. The Moving Average Convergence Divergence (MACD) is bearish on the weekly timeframe and mildly bearish monthly, while Bollinger Bands indicate a bearish trend weekly and sideways movement monthly. The Relative Strength Index (RSI) remains neutral with no clear signal, but the overall technical momentum, as measured by the KST indicator, is bearish weekly despite a bullish monthly reading.

Additional technical signals such as the Dow Theory and On-Balance Volume (OBV) also reflect mild bearishness on the weekly scale, with no clear trend monthly. Daily moving averages remain mildly bullish, but this has not been sufficient to offset the broader negative technical outlook. The stock’s price has declined 2.23% on the day to ₹1,398.20 from a previous close of ₹1,430.15, trading closer to its 52-week low of ₹1,115.55 than its high of ₹1,611.20, underscoring the technical caution.

Flat Financial Performance Raises Concerns

Reliance’s financial trend has also contributed to the downgrade. The company reported flat results in Q3 FY25-26, with a quarterly PAT of ₹18,645 crore, representing a 10.3% decline compared to the previous four-quarter average. This stagnation in profitability contrasts with the company’s historical growth trajectory and raises questions about near-term earnings momentum.

Moreover, the debtors turnover ratio for the half-year period is at a low 24.77 times, indicating slower collection efficiency which could impact working capital management. Despite this, Reliance maintains a strong ability to service its debt, with a low Debt to EBITDA ratio of 1.04 times, reflecting prudent financial management and limited leverage risk.

Valuation and Quality Metrics

From a valuation standpoint, Reliance Industries presents a mixed picture. The company’s Return on Capital Employed (ROCE) stands at 11.8%, which is respectable but not exceptional for a large-cap oil sector player. The Enterprise Value to Capital Employed ratio is 2, suggesting a fair valuation relative to the capital base. The stock currently trades at a discount compared to its peers’ average historical valuations, which could be seen as a positive for value investors.

However, the company’s Mojo Score has declined to 47.0, resulting in a Mojo Grade downgrade from Hold to Sell. The Market Cap Grade remains at 1, reflecting Reliance’s status as the largest company in the sector with a market capitalisation of ₹18,92,110 crore, constituting 65.35% of the entire oil sector. Despite this dominance, the quality grade has been impacted by the flat financial results and weakening technicals.

Financial Trend and Long-Term Growth

While the recent quarter was flat, Reliance’s long-term financial trend remains healthy. Net sales have grown at an annualised rate of 17.69%, and operating profit has increased by 17.98% annually, demonstrating sustained operational strength. Over the past year, the stock has delivered a 16.14% return, outperforming the Sensex’s 10.29% return over the same period. Profit growth over the last year has been robust at 20.3%, with a PEG ratio of 1.1 indicating a reasonable balance between price and earnings growth expectations.

Institutional holdings are high at 39.37%, signalling confidence from sophisticated investors who typically have superior analytical resources. This institutional backing provides some support amid the current downgrade.

Comparative Performance and Market Context

Despite the downgrade, Reliance’s long-term performance remains impressive. Over a 10-year horizon, the stock has generated a staggering 549.63% return, more than doubling the Sensex’s 258.10% gain. However, over the medium term, the stock has underperformed the benchmark, with a 3-year return of 28.58% compared to the Sensex’s 38.36%, and a 5-year return of 43.02% versus the Sensex’s 61.20%. This relative underperformance, combined with recent technical deterioration and flat quarterly earnings, has contributed to the cautious stance.

Summary and Outlook

The downgrade of Reliance Industries Ltd to a Sell rating by MarketsMOJO reflects a comprehensive reassessment of the company’s investment merits across four key parameters: quality, valuation, financial trend, and technicals. While the company remains a sector leader with strong institutional support and solid long-term growth, the recent flat quarterly results, weakening technical indicators, and relative medium-term underperformance have raised caution flags.

Investors should weigh the company’s fair valuation and robust market position against the current technical weakness and earnings stagnation. The downgrade signals that, for now, the risk-reward balance has shifted towards a more cautious stance, suggesting that investors may consider reducing exposure or seeking superior alternatives within the oil sector or broader market.

Reliance’s ability to service debt remains strong, and its long-term fundamentals are intact, but the immediate outlook is clouded by technical and earnings challenges. Market participants will be closely watching upcoming quarterly results and sector developments to gauge whether the stock can regain momentum or if the bearish technical trend will persist.

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