RIL Stumbled on Higher Green Capex and Potential Negative FCF in the Coming Days

Reliance Industries Ltd (NS:RELI)stumbled almost -4.63% since Thursday (24th June) after its 44th AGM. The primary reason is the green (RE) CAPEX (initial) announced for Rs.75B for the next three years (FY: 23-25), which may cause more negative FCF (Free Cash Flow) for the company and lower ROCE (return of capital employed). The market was expecting a much lower initial green CAPEX from RIL due to poor visibility of the green economy by the next few years for a country like India. RIL may also take fresh debt after initial Capex as per evolving situation/progress of the RE business.

Also, RIL’s emphasis on 5G Capex despite its uncertain outlook in India may be another factor that disappointed the market. Overall, the long gestation period nature of RE and telecom (5G) business and depressed FCF may keep RIL’s gross debt at elevated and ROCE at muted levels in the coming years amid falling EBITDA margin for its cash-cow petrochem business. For MDA, data was like new oil (unlimited); petchem profit was the main support for cash-burning telecom and retail business. But when petchem cash flow slows, it will bound to affect other startup ventures (RE, digital and retail).

In the last 15-years, RIL generated consistently negative FCFC due to its huge Capex for its refinery/oil and telecom business. RIL was virtually a debt-free company (on a net basis) till a few years ago, but over the last few years, it has to take huge debt to support its telecom (Jio) dream and oil CAPEX (to support efficacy/refining margin and expansion/diversification).

Raising debt or equity was never a problem for a company like RIL, because of the market trust in its management/Chairman Mukesh Dhirubhai Ambani (MDA). But, as a visionary and debt-shy entrepreneur, MDA knows very well when to sell out the stake of a profitable business to slash huge debt(unlike his younger brother ADA). In 2020, just after COVID lockdown started locally and globally, RIL deleveraged at a record pace for its digital (Jio) business, taking the advantage of COVID theme, when the world runs on data, not oil. MDA was also able to sell a part of his retail business.RIL also divested a significant part of its Jio network assets (telecom Tower) to Brookfield.

RIL also entered a JV with BP (LON:BP) for 49% of its Petroleum (fuel-marketing) business for $1B. Before COVID, the market cheered the RIL-Saudi Aramco MOU, which was likely to be converted into a $15B deal (20% stake including 51% stake of petroleum JV). Saudi-Aramco valued RIL at $75B enterprise value, which may be far higher than the fair market valuation at that time. The market also cheered about RIL’s plan to further deleveraging in the years ahead with a high potential listing of R-Jio and Reliance retail; R-Jio may be also listed in Nasdaq due to high FDI and some other regulatory/taxation factors.

Thus overall, it’s the story of deleveraging and thrust in a new business model as per evolving economic scenario. But in the AGM, there were no definitive comments by MDA over the Saudi Aramco (SE:2222) deal or any potential listing of R-JIO and R-Retail. The focus was on RIL’s CSR and other social activities over COVID and venture into new RE business. Subsequently, RIL tumbled. Apart from deleveraging issues, the market may be also concerned about RIL as any greenfield RE business has a significantly long gestation period and thus consolidated FCF may be negative for the foreseeable future.

RIL’s digital and even retail business (essential/grocery items) was also a part of the K-Shaped economic boom after COVID. RIL is now gradually transformed itself from fossil fuel (oil) heavy business to green fuel (RE) along with digital and retail (consumer business). Visionary MDA knows that the days of oil (fossil fuel) supremacy are over and the world will now gradually shift to green energy. The transition is rapidly happening in AEs (U.S./Europe) including China, and India is bound to follow.

The transition of black to green energy will also act as a huge infra/green stimulus to set up an affordable green energy ecosystem (like EV, charging stations, EV battery, solar battery etc). Also, incrementally higher green capex and lower oil capex may result in demand/supply mismatch in the coming years and oil may jump further due to lower production.

As a private refinery, RIL doesn’t enjoy any government subsidy for its Indian operations. Higher oil prices and higher oil taxes in India are resulting in abnormal retail prices for transportation fuel (petrol/diesel) and lower demand at retail levels, especially amid lingering COVID lockdown. Thus RIL is also eager to sell a significant part of its refining business to Saudi Aramco for further deleveraging. The talks of the Saudi Aramco deal was also a major boost for the scrip in the last few weeks, especially after the report of Aramco CEO Yasin being inducted into the RIL board.

The market was expecting some definitive announcement about the Aramco deal by MDA in the 44th AGM. But MDA said discussions are going on and he is expecting some deal (transactions) by FY22 (Mar’22). MDA also indicated the lower amount for any deal amid changing prospects of the oil industry post-COVID (transition to green energy from fossil fuel). Saudis are not foolish and they will not go by earlier indicative deal of $15B (20%RIL stake including 51% stake of petroleum JV), valuing RIL for $75B. Saudi Aramco already expressed an unwillingness to go by any pre-COVID MOU (non-binding). They will do their math and only go for any deal, which is also beneficial for their shareholders, primarily the Saudi government (Royal family-MBS).

Highlights of MDA speech in the 44^th RIL AGM:

• FY21 consolidated revenue Rs.5.40T with a sharp increase from consumer business (digital and retail)
• FY21 consolidated EBITDA was around Rs.0.98T and almost 50% was contributed by consumer business
• FY21 export Rs.1.45T across 107 countries; RIL remains India’s largest exporter, accounting for around 6.8% share; the majority of RIL’s petchem revenue comes from export
• Gross capital raised over Rs.3.24T through stake sales in Jio, Retail, RIL rights, and asset monetization
• FY21 consolidated revenue for Jio around Rs.0.86T; EBITDA Rs.0.32T; net addition of 37.9M subscribers; total network subscribers 425M; i.e. almost 30% of Indian population now use Jio
• Reliance Retail is now the undisputed leader in organized retailing in India with a scale more than 6x than the nearest competitor
• FY21 retail revenue was around Rs. 1.54T with EBITDA Rs.0.10T; upbeat performance despite a challenging year (COVID disruptions); an industry leader in grocery, electronics and apparels
• FY21 revenue for O2C (oil to chemical) business was around Rs.3.20T; EBITDA around Rs.0.38T with a margin of 11.9% despite volatile prices for both feedstocks/raw materials and final products amid unprecedented COVID disruptions and economic contraction
• Fuel retailing JV with BP operationalized in India
• The demand and margin environment for petrochemicals had recovered to pre-COVID levels by March. I am confident that our O2C business will benefit from the strong global growth environment
• As an important part of this vision of achieving accelerated growth, we look forward to welcoming Saudi Aramco as a strategic partner in our O2C business
• Despite several challenges due to COVID-19, we have made substantial progress in the past year in our discussions. These discussions have been held in the spirit of mutual commitment to convert our long-standing relationship into a perpetual partnership
• This continued engagement and resolve from both sides, even during this pandemic, is a testimony of the strong relationship between Saudi Aramco and Reliance. I expect our partnership to be formalized expeditiously during this year, after obtaining required regulatory clearances
• I am delighted to welcome H.E. Yasir Al-Rumayyan, Chairman of Saudi Aramco and the Governor of the PublicInvestment Fund, to join the Board of Reliance Industries Limited as an Independent Director. He is one of the most renowned names in energy and finance globally.
• I am sure that we will immensely benefit from his rich experience with one of the world’s largest companies, and also one of the largest Sovereign Wealth Funds in the world.
• His joining our Board is also the beginning of the internationalization of Reliance. You will hear more about our international plans in the times to come
• RIL is launching New Energy and Materials business with a 15-year commitment to become net carbon zero by 2035 as the era of fossil fuel is virtually over
• The world is entering a new energy era, which is going to be highly disruptive. The age of fossil fuels, which powered economic growth globally for nearly three centuries, cannot continue much longer. The huge quantities of carbon it has emitted into the environment have endangered life on Earth.
• Our world has only one option: rapid transition to a new era of green, clean, and renewable energy. The COVIDpandemic has further put the climate issue in the crisis bucket. Therefore, the global new energy agenda needs to move from dialogue to action, from commitment to urgent Implementation on the ground. In reality, it is not enough to be carbon neutral; the world needs to achieve absolute reductions in emissions as soon as possible.
• Huge potential for RE business, both globally and locally in the coming years
• India can’t be left behind in this green and clean energy transition just because of wealth and energy disparity; there is a need for self-reliance and affordability for Indian aspirations of green energy; India is the world’s 3^rd largest oil/energy consumer
• RIL will address the green energy divide in India just like the digital divide earlier (Jio)
• RIL will take care of RE product innovations, integrations, robust sustainable business model, and scale of efficiency
• Inviting global talents and techs/startups for RE business
• Setting up of Reliance New Energy Council with global talents to validate business strategies and embrace disruptive pathways to achieve goals
• We have started work on developing the Dhirubhai Ambani Green Energy GigaComplex on 5,000 acres in Jamnagar.It will be amongst the largest such integrated renewable energy manufacturing facilities in the world.
• Jamnagar was the CRADLE OF OUR OLD ENERGY BUSINESS.; Jamnagar will also be the CRADLE OF OUR NEW ENERGY BUSINESS.
• 3-part plan:
• The first part of our plan is to build Four Giga Factories. These will manufacture and fully integrate all the critical components of the New Energy ecosystem. One, for the production of solar energy — we will build an integrated solar photovoltaic module factory.
• Two, for the storage of intermittent energy — we will build an advanced energy storage battery factory.
• Three, for the production of green hydrogen — we will build an electrolyzer factory.
• Four, for converting hydrogen into motive and stationary power – we will build a fuel cell factory.
• Over the next 3 years, we will invest over 60,000 crore rupees in these initiatives. Reliance will thus create and offer a fully integrated, end-to-end renewables energy ecosystem.
• Emphasize on product value chain: Our first Integrated Solar Photovoltaic Giga Factory will create solar energy. We will start with raw silica and convert this to polysilicon which we will then convert to ingot and wafers. These wafers would be used to make high-efficiency solar cells and finally assembled into solar modules of the highest quality and durability
• We will target to achieve costs that are the lowest in the world to ensure the affordability of our solar modules. We are highly inspired by the goal set by our Prime Minister Shri Narendra Modiji for India to achieve 450GW of renewable energy capacity by 2030. Out of this, I am pleased to announce today, that Reliance will establish and enable at least 100GW of solar energy by2030. A significant part of this will come from rooftop solar and decentralized solar installations in villages. These will bring enormous benefits and prosperity to rural India.
• Solar energy is available only during the day, while power is needed round the clock. Therefore, storage is an important piece of the puzzle to solve. For this, we will launch our second initiative — an Advanced Energy Storage GigaFactory.We are exploring new and advanced electrochemical technologies that can be used for such large-scale grid batteries to store the energy that we will create. We will collaborate with global leaders in battery technology to achieve the highest reliability for round-the-clock power availability through a combination of generation, storage, and grid connectivity
• Besides Electricity, Green Hydrogen will be a unique energy vector that can enable deep decarburization of many sectors such as transportation, industry, and power. One of the most common methods of generating Green Hydrogenis by electrolysis of pure water through Electrolysers. This brings me to our third initiative — an Electrolyser Giga Factory to manufacture modular electrolyzers of the highest efficiency and lowest capital cost. These can be used for captive production of green hydrogen for domestic use as well as for global sale
• And, finally, our fourth initiative will be the Fuel Cell Giga Factory. A Fuel Cell uses Oxygen from the air and hydrogen, to generate electricity. The only emission of this process is non-polluting water vapour. In the new era, Fuel Cells will progressively replace internal combustion engines. Fuel Cell engines can power automobiles, trucks, and buses. They can also be used in stationary applications for powering data centres, telecom towers, emergency generators, and microgrids and industrial equipment.
• This brings me to the second part of our plan – providing infrastructure and materials to support the four Gigafactories. Our Jamnagar complex will provide infrastructure and utilities to manufacture ancillary material and equipment needed to support these Giga factories so that all critical materials are available in time. We will also support independent manufacturers with the right capabilities to be part of this nationwide ecosystem.
• We will invest an additional Rs.15,000 crore in the value chain, partnerships and future technologies, including upstream and downstream industries. Thus, our overall initial investment from our internal resources in the New Energy business will be Rs.75,000 (over $10 billion) crore in 3 years
• Setting up of a dedicated Renewable Energy Project Management and Construction Division and Renewable Energy Project Finance Division
• The Renewable Energy Project Management and Construction Division will provide gigawatt-scale end-to-end solutions for large renewable plants across the world. It will enable and partner with thousands of Green MSMEEntrepreneurs, who can deploy kilowatt to megawatt-scale solutions in agriculture, industry, residences and transportation
• The Renewable Energy Project Finance Division will provide financial solutions to the stakeholders in our ecosystem. We will achieve our goals by enabling a platform to source long-term global capital for these investments at the most attractive terms. We will seek support from our relationship banks and global green funds for this purpose. Simultaneously, we will also facilitate a platform to provide financing for the entire ecosystem of small businesses and entrepreneurs who invest alongside with us
• All of these three parts together constitute our architecture for India’s decentralized Green Economy. Over a period of time, it will generate millions of new and high-value job opportunities for our youth. With these new initiatives, Reliance will put Gujarat and India on the world solar and hydrogen map
• All our products will proudly proclaim: Made in India, by India, for India, and the world! This will be Reliance’s yet another big contribution to our Prime Minister’s clarion call of Atmanirbhar Bharat
• I am certain that India will present to the world a template of a Green Economy Movement, which will truly be a people’s movement. Solar power is the primary source of energy for our Planet Earth. ‘Soorya Dev’ has blessed India with almost limitless sunlight. I envision a future when our country will be transformed from a large Importer of Fossil Energy to a large Exporter of Clean SolarEnergy solution
• A vision of New Materials, Green Chemicals/Fertilizers and e-Fuels
• We will transform our legacy business into a sustainable, circular, and net-zero carbon materials business. One that will provide growing returns over several decades. And we will do this by repurposing our existing assets to extend their economic life and earning capacity. In doing so we will have no legacy asset write-downs in the coming years
• This twin execution plan of building a New Energy and materials ecosystem and decarbonizing and repurposing our existing O2C business is a multi-decade growth path for our company. It has the potential to create unprecedented value for India and Reliance in the coming years. Let me tell you, in all humility, that New Energy is the most exciting, most challenging and most purpose-driven mission will be pursuing in my life. I seek your blessings and support for success in this mission
• Almost 45% growths in Indian data consumption in 2020 amid COVID digital theme
• Invested around Rs.0.57T to acquire additional 4G spectrum, now operationalized almost 100%
• Capex of around Rs.0.15T in Jio network up-gradation to cope with rising demand; now additional 200M subscribers could be added
• Vows to make India 2G-mukt (free) and 4G/5G-yukt (only) by launching a cheap/affordable smartphone called JIOPHONE with Google (NASDAQ:GOOGL) JV on 10^th Sep’21 (auspicious occasion of Ganesh Chaturthi)
• Enhanced partnership with Google, Facebook (NASDAQ:FB), and Microsoft (NASDAQ:MSFT) to ensure ‘Digital Society’ in India
• Despite COVID related challenges, significant progress of Jiofiber
• Testing 5G in India together with global partners
• Tremendous progress and potential of Reliance Retail and Jio Mart; making a robust plan for sustainable incremental growth trajectory in the coming days
• Total Capex by RIL in the last ten years was over $90B; expecting over $200B in the coming ten years directly and through partners
• Mantra: New Reliance for New India

Concluding Remarks:

We are meeting at a time when the second wave of the Covid pandemic is fast receding. Under the leadership of Prime Minister Shri Narendra Modi, the Central Government and all the State Governments, along with civil society organizations and corporates, have coordinated a massive effort in this fight. But as a company, as a country, as mankind — and each one of us as individuals — we have learned an important lesson. We must be far better prepared to face such crises in the future and never let our guard down.

To achieve this, the most essential resource we need — which is also the most useful resource — is a POSITIVE MINDSET. In trying times like this, POSITIVITYacts like a highly effective medicine. It works wonders for individuals, families, and society.

Despair weakens us. Determination strengthens us. Negativity numbs us with pessimism and inaction. Positivity provides us with hope and confidence. Our ancient civilization has survived many crises in its long history. Because our forefathers had UNLIMITED POSITIVITY and SELF-BELIEF, my father, Dhirubhai Ambani, used to say, “Challenge negative forces with hope, self-confidence, and conviction, and he ambition and initiative will ultimately triumph.”

I do not doubt that India will conquer the COVID crisis — sooner rather than later. Post-COVID, India will emerge stronger. It will be a Better India, a Resurgent India, a more Equal India, and a far more Self-Confident India. I foresee that the Indian economy will bounce back at a rate that will surprise the world. And prosperity and opportunities will be created for all on a scale never seen before. Not for a few, but for all 1.35 billion Indians. Indeed, I see the global economy resetting itself in ways that will create a more EQUAL WORLD. May God forever guide us along this path.

Bottom line:

RIL/MDA is relying on the ‘great reset’ theme post-COVID and thus resetting itself; asked for positive thinking rather than negative. But the market is quite sceptical, not yet convinced as any new venture will be both capital and time-intensive.

Technical View: RIL

RIL now needs to sustain above 2070 areas; otherwise, 2027-1960-1875 may be on the card; 1900-1875 zones should offer strong buying support. On the other side, RIL needs to sustain over 2125-2180-2275 areas for 2380 and above.

Source : investing