New Energy To Pivot RIL Into Global Alternative Technology Supplier: Morgan Stanley
Reliance Industries Ltd.’s plan to provide solutions related to hydrogen, solar PV and grid batteries is “unique” and could allow it to stand out as “one of the most integrated infrastructure providers”, not just in India but globally, according to Morgan Stanley.
“We expect silicon and hydrogen to emerge as the next decade’s ‘new oil’ for RIL, with potentially up to $60 billion (Rs 4.44 lakh crore) in value creation if things fall into place by 2025,” the research house said in a report. In base case, it expects a $25-billion (Rs 1.85 lakh crore) contribution into one-year forward NAV and sees a steady return on capital employed of 11-13%.
The oil-to-telecom conglomerate, according to the report, intends to be an enabler more than a producer of electrons and green molecules. The area has not only high entry barriers but also the potential to provide an alternative technology supply to the globe with the current geopolitical setup. That, along with its focus on carbon capture, hydrogen and biofuels, would make RIL the world's largest renewable infrastructure producer by 2030.
RIL’s new energy Ebidta potential is as big as the contribution from its petrochemicals business now, but it will command a multiple twice as large, the report said. “Although RIL is up 27% so far this year, it still trades at a discount to market and peer multiples, and we think no value is being attributed to the new energy business.”
In June, Mukesh Ambani, chairman and managing director at RIL, unveiled a plan to scale up zero-carbon hardware, including four gigafactories to manufacture photovoltaic modules, batteries, fuel cells, and electrolysers to produce hydrogen. This, Morgan Stanley said, would help capture not only India’s large total addressable market of 300 gigawatt of renewable solar capacity and 20 GW of electrolysers, but also contribute to the upcoming global demand.
The investments are not without risk in execution and technology changes, but with global partnerships, the likelihood of RIL delivering on this new business and outperforming expectations cannot be ruled out, as it leverages the know-how, infrastructure and cash flows from its existing energy business, the report said. “Considering the large domestic market and global focus on diversifying the sourcing of solar panels and batteries, the hurdle for RIL to take market share is not as high.”
Besides, the government policies in India are offering investment support and developing the net-zero ecosystem. The ESG focus is leading to a significant upcycle in RIL’s existing energy portfolio and it’s expected to drive earnings upgrades in the next few years, the report said.
Rising chemical prices, near multi-year high gasoline margins, expectations of diesel demand recovery with opening of travel, rising broadband subscribers, and increasing gas production are other near-term catalysts.
Morgan Stanley has upgraded RIL’s target price to Rs 2,925 apiece from Rs 2,269, an upside potential of 14.4%. It also increased its FY23 and FY24 earnings per share estimates for the company by 9% and 6%, respectively.
Changes in technology.
Falling hydrogen electrolyser prices.
Cost competitiveness relative to China.