RIL’s fourth investment round will unfold with $60 billion in value creation, Morgan Stanley says

  • RIL is now entering its fourth investment round, says Morgan Stanley.
  • He pledged a massive investment of ₹75,000 crore (about US$9.4 billion) in the new energy ecosystem.
  • RIL’s investment cycles have generated 2 to 3 times the creation of shareholder value over the past two decades, says Morgan Stanley.
  • “We see up to $60 billion in value creation in the new energy sector by 2025,” the report said.
  • However, if refining margins are hit, Reliance’s annual debt will increase by $3 billion a year and impact cash flow.

Reliance has always grown in size – and each investment round it undertakes is bigger and “newer” than the last. According to Morgan Stanley, the oil, telecom and retail giant is now entering the fourth round of investment, after the company pledged a massive investment of ₹75,000 crore (about $9.4 billion) in a new energy ecosystem.

In his own words, RIL President Mukesh Ambani called him the most ambitious of all time, during the 45th Annual General Meeting.

In its latest report, Morgan Stanley claims that each time RIL has reinvented its business, it has exceeded investor expectations.

“Investment cycles have unfolded with approximately two to three times the creation of shareholder value over the past two decades, with each decade seeing approximately $60 billion in market capitalization creation,” the report said.

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

“RIL’s integrated approach to solar panels and mobility/storage batteries, and focus on providing an alternative to China stands out and we see up to $60 billion in value creation in the new energy sector by 2025. We are increasing our baseline valuation of new energy to $32 billion to account for faster monetization,” the report states.

RIL, which is a net consumer of energy in Jamnagar, will make the green choice by setting up more solar and green hydrogen projects that can help reduce its own energy costs. Additionally, it will also focus on producing high value-added chemicals from its petroleum coke gasifiers.

It will also enter the engineering, procurement and construction sector for the sale of panels and will sell panels with solutions through multiple investments in technology to global customers.

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

How did the old RIL investment cycles work?

Starting in 1997 with the commissioning of the Jamnagar refinery, RIL has gone through three major investment cycles so far. These concern the gas fields at KGD6, the expansion of Jamnagar in 2012 and the big comeback in telecommunications.

Although they created value, it did not cost the organization dearly in the form of write-offs, write-downs and “disputed capex”.

“In each investment cycle, RIL has also had its share of challenges, such as amortizing investments in petroleum coke gasifiers, telecom spectrum and upstream shale investments,” the report said.

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

RIL also had to revamp its retail investments between 2006 and 2010 and emerged stronger in 2015-2016, according to the report.

Capex RIL disputed

Year Contested investments
AF03-AF10 $12.5 billion upstream exploration and production – Includes $2.7 billion writedown taken on shale investments
FY12-FY16 $8 billion investment in petroleum coke gasifier
EX18 $2 Billion Spectrum Cancellation
EX22 $4 billion impact on value of petroleum coke gasifier during land clearing

Source: Morgan Stanley

Telecommunications and retail companies are ‘seating in’

Morgan Stanley thinks the time is right for new energy investments. Its other activities are happening and should happen faster in the future.

After launching the company with “free data” while retaining the tag of providing the cheapest data deals, Jio is poised to reap the benefits.

The telecommunications sector has become a three-player market and the report predicts that the average revenue per user will increase by more than 50% over the next four to five years. This means Jio’s revenue can reach 1.6 times its FY22 levels. It also expects its investments in 5G to generate faster monetization than 4G.

The biggest benefit new energy investments bring is global and domestic support as India commits to net zero emissions by 2070. However, green hydrogen, solar panels and battery technology are a rapidly evolving industry with new changes on the way.

“Political support in this round is also growing for the new energy vertical and the government recently approved a bill in parliament to increase the use of alternative fuels, provide incentives for new energy investments and starting carbon trading also indicates an increase in the total addressable market for RIL – something we have seen less of in previous rounds,” the report said.

But there is a catch. For its new energy business to function properly, RIL needs its refining business to continue. Refining margins fund nearly a third of RIL’s capital plans and if margins were to drop to a low cycle because business is cyclical, it would reduce operating cash flow by 20% and debt. annual would increase by $3 billion, according to Morgan Stanley’s calculations.

“While the cycle’s low refining gross margins are not sustainable as there would be a supply response, we are seeing a 15% net impact to our net asset value as RIL would also see its multiple depreciate. “, says the report.


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