Director’s Cut: Mukesh Ambani’s showmanship is great, but what about value unlocking, asks market

• Investors hope capex intensity is behind RIL now as Mukesh Ambani promises to keep financial ratios in check.
• Section of the market that was expecting updates on incremental value unlocking events will be disappointed.
• Green energy plan is coming together finally with the company looking to commence manufacturing of solar PVs from FY25.

The 46th Annual General Meeting of Reliance Industries was on expected lines. It had star power (from Wall Street), fireworks and an emotive trip down memory lane. From remembering his father Dhirubhai Ambani and his outsized dreams to his own induction into the RIL’s board at the age of 20, Mukesh Ambani’s time travel between the past and future kept analysts and media busy for several hours. His speech ticked all the right boxes. His succession plan is firmly in place with all three of his children being inducted on the board. The boss of India’s most valuable company praised his children for earning their stripes and took on the mantle of mentoring them ahead too.

But the market was expecting much more than showmanship this year, as the company’s earnings performance remains below its expectations. Analysts do not see any particular trigger for the stock. For investors fretting over negative free cash flows and very high capital expenditure, Ambani underlined the importance of financial discipline. The management is committed to the management is committed to maintaining headline net debt/EBITDA below 1x. The good news, however, ends here. The company has not announced any near term measure that will give better visibility on earnings. Most equity broking houses have retained their earnings outlook on RIL.

AGM Is Big On Strategy, But Not Much on Value Unlocking...

The management of RIL gave no timeline on the possible listing of its telecom and retail businesses. In 2019, Ambani had said that the businesses would be listed in five years and even though four years are over, he refused to spell out details on either of the businesses. According to a report by the BoFA Global Research, “While the Chairman mentioned about Jio Financial Services, there were no major incremental updates related to business strategy in near-term. In our view, a section of the market that was expecting updates on incremental value unlocking events would likely be disappointed.”

On the upside, RIL has indicated that more global and strategic investors are keen on investing in Reliance Retail, following the $1 bn investment by QIA. Says Kotak Institutional Equities in its report, “Likely there will be further stake-sales in due course. Reliance Retail through its accelerated store expansion and new commerce ramp-up now serves 98%+ of India’s PIN codes. RIL expects retail to be its fastest-growing business in revenue/EBITDA.”

Broad Contours of Strategy Suggest Capex Intensity Is Over

Following the speech and commitment to keeping net debt/EBITDA at 1x, the market is assuming that the capex intensity will abate from FY25 onwards. The company will now look at sweating its assets. The broader contours of its strategy seem to suggest that the key focus will be on value creation for investors and shareholders through its disruptive strategy in sectors where there is a large unmet demand like it has shown in retail and telecom.

According to IIFL, “With RIL’s mega capex cycle announcements phase now behind, sweat assets are to be in focus. Mr Ambani also affirmed his role as the company's chairman for an additional five years, during which he will actively engage in training and mentoring the next generation of leaders.”

Jefferies, which expects lower capex in Jio in FY25E with 5G network capex, says:. “We keep earnings unchanged as limited new information on near- term targets were shared. No major new capex was announced.” The market will surely frown on any execution glitch or higher capex than what the company has indicated.

New Energy Piece Is Finally Coming Together

The company’s new energy piece is finally coming together, with Ambani sharing some details of how it plans to migrate its existing energy business to a green one. The O2C business will develop materials for the green energy business, which in turn will produce renewable energy and green hydrogen. The green energy sources will power its chemical plants which will produce green chemicals. According to Goldman Sachs, “RIL’s newly announced wind power equipment manufacturing foray, where it intends to utilize carbon fiber produced at its Hazira plant (under construction) to cut costs of wind turbine blades. This wind capacity, along with solar and batteries, should in turn help reduce carbon emissions (and power cost) of the carbon fiber plant.”

The global investment bank says that RIL has also reiterated its guidance for installing 100GW renewable capacity by 2030. The company’s fully integrated solar PV plant is scheduled to commence production in phases and the battery giga-factory is expected to manufacture cells, packs and battery chemicals by 2026.