Shares of Reliance Industries Ltd. fell for a fourth day as analysts seek clarity about the Indian conglomerate’s ambitious Rs 75,000-crore ($10.1 billion) plan to invest in clean energy.
The Mukesh Ambani-owned conglomerate plans to spend Rs 75,000 crore — Rs 60,000 crore in next three years and Rs 15,000 crore on value-chain partnerships and future technologies — to build an ecosystem to make solar modules and batteries to hydrogen fuel cells in India.
RIL has started work on developing the Dhirubhai Ambani Green Energy Giga Complex on 5,000 acres in Jamnagar, Ambani told investors at the company’s 44th annual general meeting. The decision may weigh on the share price until there’s clarity on potential returns, analysts at JM Financial wrote in a note.
Ambani also said Saudi Aramco would invest in the Indian group’s oil-to-chemicals business, and the deal would close this fiscal. Aramco’s chairman, too, would join RIL’s board as an independent director as part of the deal.
Besides, it unveiled an affordable smartphone, JioPhone Next, co-developed with Google Inc. to entice 2G and basic phone users; detailed five key initiatives for Reliance Retail; and indicated on 5G launch soon.
Here’s what analysts have to say about RIL…
JPMorgan
- Maintains ‘neutral’ with a price target of Rs 2,250 apiece.
- Higher value for retail (on higher peer group valuations) drives March-22 target price to Rs 2,250 versus earlier price target of Rs 2,055 apiece.
- Key highlight from AGM was RIL’s announcement of about $10-billion capex in green/renewable businesses over the next three years.
- The smartphone announcement and the induction of Aramco chairman into RIL’s board were on expected lines.
- There was no timeline on WhatsApp-JioMart, no timeline on IPOs of Jio/retail.
- Given the run-up in the stock price over the last six weeks (17% v/s 7% for Nifty), JPMorgan would not be surprised to see some of the outperformance reverse.
- Value accretion could increase from the investments as RIL ramps up execution on these businesses.
Motilal Oswal
- Reiterates ‘buy’ with a target price of Rs 2,430 a share.
- RIL announced its next big value creation engine with the launch of its New Green Energy business. With the peak of the investment cycle behind in Reliance Jio and Reliance Retail, it now plans to invest Rs 75,000 crore towards this ambition over the next three years.
- A higher multiple for the digital business captures the revenue opportunity, potential tariff hikes, and opportunity in the feature phone market.
- Have also given a higher multiple for the retail business, which captures the acceleration in store openings, digital commerce, and the new JioMart platform
- Values the O2C business at FY23E EV/Ebitda of 7.5x, arriving at a valuation of Rs 764 a share for the standalone business, and add Rs 68 for the E&P assets.
- Ascribes an equity valuation of Rs 847 a share to Reliance Jio on FY23E 20x EV/Ebitda.
- Ascribes equity valuation of Rs 755 a share to Reliance Retail on FY23E 35x EV/Ebitda, factoring in the recent stake sale.
Jefferies
- Maintains ‘buy’ rating with a target price of Rs 2,540 apiece.
- RIL’s renewables transition plan dominated the AGM. The plan sounded ambitious with little details but should improve its ESG score.
- The energy transition plan is essential in given that a significant portion of its conventional energy assets will approach end of life over the next two decades. This will allow RIL to participate in India’s energy consumption growth story over a longer horizon.
- The extent of the upfront cash component in the Aramco transaction will determine the extent of the benefit to RIL. An all-cash transaction will also reduce RIL’s carbon footprint.
- RIL’s keenness on 5G services may lead to a 5G capex cycle and hit free cash flow but may consolidate the market.
- The AGM focused on the new commerce initiatives even while brick & mortar expansions would continue.
- With specifics for the renewable capex and the 5G foray not yet available, the research house’s capex assumptions would undergo upward revisions.
CLSA
- Retains ‘outperform’ with a target price of Rs 2,250 apiece.
- Welcomes Reliance exhibiting hopes of closing the O2C stake sale with Aramco this year.
- While clarity on the new energy foray is useful, it will be watching additional triggers for the stock in the smartphone and retail end.
- Big take-up of new smartphones and progress in omni-channel retail will be more important triggers.
JM Financial
- Retains ‘buy’ with a target price of Rs 2,500 apiece.
- Reliance’s plan to produce 100GW solar power by 2030 will help its vision of becoming net-carbon zero by 2035.
- The new energy business may defer free-cash-flow generation and will pose a near-term overhang on the stock until there is more clarity on potential return profile.
- It will also be the first to launch 5G in the country, with its indigenous 5G solutions rolled out across trial sites.
- Reliance plans to export its 5G and associated technologies, once proved in India, which would pivot Jio Platforms into a global technology player.
Edelweiss
- Maintains ‘buy’ with a target price of Rs 2,105 apiece.
- Reliance is now on course to bring its third deepwater MJ field on-stream by FY23 and will produce 30 mmscmd of gas to meet 20% of India’s gas demand.
- The comments on upstream business are big positive as the company’s large satellite field have started production ahead of schedule.
- Edelweiss expects gas will be a key driver contributing Rs 10,000 crore to Ebitda by FY24, while consumer-facing, Reliance Jio and retail will contribute to half of Reliance’s Ebitda by FY25. It, however, sees huge scope for the oil-to-chemicals business.
Kotak Securities
- Rates ‘add’ with a price target of Rs 2,200.
- RIL’s foray into the new energy business could benefit from policy initiatives to encourage domestic manufacturing of solar energy equipment.
- Partnership with Aramco will enable RIL to shift its capital allocation from legacy O2C business to the new energy and materials segment.
- The target of three times growth in retail business will be supported by investments in supply chain infrastructure, large-scale expansion of sourcing ecosystem and retail footprint along with delivery hubs.
- The pricing will be the key to affordable smartphone- JioPhone Next as the affordability remained a challenge even for JioPhone.
- The company has provided updates on progress of new initiatives in digital services segment like strategic partnership with Google Cloud, JIO-AZURE Cloud Data centers, acceleration of JioFiber rollout and indigenous 5G solutions.
BofA Securities
- Rates ‘buy’ with a price target of Rs 2,550 apiece.
- Announcement of $10 billion capex in the new energy is a good decision from a long-term perspective.
- The capex investments in new energy, coupled with investment in 5G, will likely push RIL away from its recently achieved zero net-debt position to slight debt position of less than 1 time net debt/Ebitda.
- Jio may see an acceleration in its net additions after the availability of JioPhone Next. The potential for this phone launch is likely to create an overhang on Bharti/VIL share prices.
- JioMart’s and JioFiber continues to emerge as one of the dominant players.
- Focus on building a new energy and materials ecosystem is unlikely to be easy. Capex overshoot risks remain but it will help improve focus on RIL by ESG investors.
Citi
- Rates ‘neutral’ with a price target of Rs 2200.
- The announcements on clean energy are promising and should help pivot the company towards a low carbon future.
- However, it may be premature to incorporate any value accretion to the planned clean energy investments.
- There is a fair degree of uncertainty on the payback & IRRs of such investments and the market potential. Some of these technologies are still very niche in India (barring solar).
Emkay
- Rates ‘hold’ with a target price of Rs 2,330.
- The induction of Rumayyan, although as an independent director, implies that Aramco deal is in progress.
- E&P would be a source of significant value and sustained earnings growth over the decade.
- New JioPhone price should be at a steep discount to current handset ASPs factoring in Jio’s aggression and underlying fundamentals of being affordable.
- Reliance Retail is, targeting more than 3 times growth in revenues in the next 3-5 years.
- Core retail business to witness a digital transformation and will shift to Google Cloud infrastructure.
- Forecasts a 28% revenue CAGR for the core retail business in five years.
HDFC Securities
- Rates ‘add’ with a price target of Rs 2,280.
- Ebitda growth in the digital business will be driven by improvement in ARPU, subscriber addition and newer revenue streams.
- There is a potential for further value unlocking in the digital and retail businesses.
- Saudi Aramco deal is expected to be formalised this year. The deal announced in FY19, valued RIL’s O2C business at an EV of $75 billion. This valuation should increase the target price for the stock by Rs 285/share, taking it to Rs 2,565.
- Cuts FY22/23 EPS estimates by 10.0/2.1% on account of reduction in the GRM and petrochemical margin assumptions.
