RIL’s fourth capex cycle will unwind with $60 billion value creation, says Morgan Stanley

• RIL is now entering its fourth capex cycle, says Morgan Stanley.
  
• It has pledged a massive ₹75,000 crore (approx. $9.4 billion) investment into the new energy ecosystem.
  
• RIL’s investment cycles provided 2-3x value creation for shareholders in the last two decades, says Morgan Stanley.
  
• “We see up to $60 billion value creation in the new energy business by 2025,” the report says.
  
• However, if refining margins are hit, Reliance’s annual debt will go up by $3 billion per annum and impact cash flows.
  

Reliance has always gone big – and every capex cycle it undertakes is bigger and ‘newer’ than the last. The oil to telecom to retail major is now entering into the fourth capex cycle, according to Morgan Stanley, after the company pledged a massive ₹75,000 crore (approx. $9.4 billion) investment into a new energy ecosystem.

In his own words, RIL’s chairman Mukesh Ambani called it the most ambitious ever, at the 45th annual general meeting.

In its latest report, Morgan Stanley says that every time RIL re-imagined its business, it has executed above investor expectations.

“Investment cycles have unwound with around two to three times value creation for shareholders in the last two decades with every decade seeing around $60 billion in market cap creation,” the report says.

This fourth cycle will also produce higher value quickly as its new energy pivot is integrated with its chemicals business and its own large captive use.

“RIL’s integrated approach on solar panels and mobility/storage batteries, and focus on providing an alternative to China does stand out and we see up to $60 billion value creation in the new energy business by 2025. We raise our base case new energy valuation to $32 billion to account for quicker monetization,” the report says.

RIL, which is a net energy consumer at Jamnagar, will make the green choice by putting more solar and green hydrogen projects that can help reduce its own energy costs. Moreso, it will also focus on producing high value added chemicals from its petcoke gasifiers.

It will also enter the engineering, procurement and construction business for selling panels and sell panels with solutions on the back of multiple investments in technology to global customers.

“We estimate the business to contribute to around $1 billion in EBITDA by 2027,” the report said.

How did the past RIL capex cycles work?

Starting in 1997 with Jamnagar refinery commissioning, RIL has gone through three important capex cycles so far. These pertain to gas fields at KGD6, the Jamnagar expansion in 2012 and the great re-entry into telecom.

While they did create value, it did not come at no cost to the organization in the form of write-offs, impairments and ‘challenged capex’.

“In every capex cycle, RIL also had its share of challenges, such as the write off of investments for petcoke gasifiers, telecom spectrum and upstream shale investments,” the report said.

RIL had invested in three shale gas assets in 2010 and 2013 but exited them in 2017. In addition to investing in KGD6 block in the Krishna Godavari which is producing over 25 mmscmd of gas, RIL had also invested in Cauvery and Mahanadi basins over the years.

RIL also had to rejig its investments in retail between 2006-2010 and emerged stronger in 2015-16, the report said.

RIL capex that was challenged

Source: Morgan Stanley

Telecom and retail businesses are ‘settling’

Morgan Stanley believes that the timing for new energy investments is ripe. Its other businesses are unwinding and expected to unwind faster in the future.

After kick starting the business with ‘free data’ and still retaining the tag of providing the cheapest data offerings, Jio is on the verge of reaping benefits.

Telecom business has become a three-player market and the report expects the average revenue per user to grow by over 50% over the next four to five 5 years. That means Jio’s revenues can expand to 1.6 times its FY22 levels. It also expects its 5G investments to yield quicker monetization than 4G did.

The biggest advantage that new energy investments bring is the global and national support as India pledges to move towards Net Zero emissions by 2070. However, green hydrogen, solar panels and battery technology is a fast evolving sector with new changes afoot.

“Policy support in this cycle is also increasing for the new energy vertical and the government recently approved a bill in parliament to raise the use of alternative fuels, provide incentives for investments in new energy and start carbon trading also points to rising total addressable market for RIL – something we saw less of in previous cycles,” the report said.

But there is a catch. For its new energy business to run smoothly, RIL needs its refining business to hold steady. Refining margins fund nearly a third of RIL's investment plans and if margins were to decline to cycle low as the business is cyclical — it will reduce operating cash flows by 20% and annual debt would rise by $3 billion, as per Morgan Stanley’s calculations.

“While cycle low gross refining margins are not sustainable as there would be a supply response, we do see a net impact of 15% hit to our net asset value as RIL would see its multiple de-rate as well,” the report said.

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