Reliance Industries’ ambitious growth plans may dent return ratios, say analysts

Reliance Industries Ltd.’s capital expenditure plans across business verticals, though could spur growth, are likely to be a drag on its return ratios in near term, according to analysts.

“Retail, telecom, and new energy can be the next growth engines over the next two-to-three years, given the large technological advancements and ambitious growth targets,” Motilal Oswal Financial Services Ltd. said in its investor note. “It, however, can dent its existing single-digit return ratios in the near term.”

According to Systematix Institutional Equities, the company’s “muted return ratios of 7% to 8% need to be closely monitored after the newly announced investments”.

Kotak Securities Ltd. said while these investments will be value-accretive in the long term, it may drag near-term free cash flows.

Mukesh Ambani, chairman at the oil-to-telecom conglomerate, announced fresh investments of Rs 2.75 lakh crore for telecom and energy business, in addition to the capex announced last year, at its 45th annual general meeting on Monday.

Over the next five years, the group aims to spend:

• Rs 2,00,000 crore on rapid rollout of 5G services in India.
• Rs 75,000 crore in expanding oil-to-chemicals capacities.
• Rs 75,000 crore in new energy business, as announced last year, with the potential to double the commitment based on scalability of evolving models.

Shares of Reliance Industries opened 0.9% higher on Tuesday. Of the 39 analysts tracking the company, 31 maintain a ‘buy’, five suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies a 10.8% upside.

Here’s what analysts have to say about Reliance Industries after its AGM.

Jefferies

• Maintains ‘buy’ with a price target of Rs 2,980.
• Raises capex estimates for FY23/FY24/FY25E to Rs 1.59 lakh crore, Rs 1.55 lakh crore and Rs 1.59 trillion respectively, to factor in higher capex in Jio, conventional O2C and new energy business.
• Builds in $9 billion valuation of the O2C capex and higher subscribers in the home broadband segment.
• Projects Ebitda CAGR of 19% and attributable profit after tax CAGR of 9% over FY22-25E.
• The succession plan is along expected lines.
• Investment plans of Rs 750 billion to augment existing capacity in petrochemical business by 2026 could generate $1.5 billion annualised Ebitda from FY27E assuming five-year average spreads, implying about 15% return on capital employed.
• Jio’s fiber network, which is three to four times the fiber on networks of Bharti Airtel Ltd. and Vodafone Idea Ltd., and its investments in 700 MHz/26 GHz spectrum should help drive this business. With fiber penetration still low at 7%, there is enough scope to grow.
• To generate adequate returns on the $25 billion investment, Jio would need to monetize this capex through higher revenues in
• JioFiber, market share gains in mobile, revenues from enterprise clients and tariff hikes. Focus on differentiation by offering superior services is encouraging and provides comfort on tariff assumptions.
• Apart from the Rs 75,000 crore investment in the five gigafactories, the captive solar generation could require $12.5 billion capex per estimates. The captive solar power could lower RIL’s power costs by about $1.4 billion annually per estimates.

Morgan Stanley

• Maintains ‘overweight’ with price target Rs 3,015.
• Chairman sounded optimistic in retail segment delivering exponential growth and becoming the largest segment within the group.
• Reliance will have to invest in brand building and marketing to transform its retail business from private label to full-fledged FMCG operations.
• The chairman, while responding to the shareholder questions, said that he will update regarding the planned initial public offering of
• Reliance Retail in the group’s annual general meeting next year.
• Tightening global refining and chemical markets on cost curve, rising market share and reduced competitive intensity in telecom industry and partnerships in new energy business are risks to upside.
• Ban on single-use plastic hurting margins in the medium term, new investments seeing execution hurdles and delay in monetisation of its energy and telecom assets are the risks to downside.

BofA Securities

• Keeps ‘buy’ rating on the stock but cuts price objective to Rs 2,805 from Rs 2,820 to factor higher capex.
• Expects Reliance Jio to spend $9.1 billion on capex, excluding spectrum, from FY23-25.
• Reliance Jio will likely be aggressive in 5G rollout to target high end market, forcing Bharti Airtel to respond. However, its advantage could neutralise if there are no good mass scale 5G use cases.
• Jio could have a differentiated offerings around cricket using 5G as it owns exclusive digital rights for Indian Premier league.
• Expects Jio to announce the launch of a low-cost Jio-Google 5G phone in coming months.

Macquarie

• Keeps ‘underperform’ rating on the stock owing to high expectations of spin offs and consensus cutting earnings per share. Twelve-month price target at Rs 2,000.
• Reliance’s 2022 AGM was largely a reiteration of the key long-term focus areas.
• Today’s market cap already assumes some combination of $100 billion value for Retail, $100 billion for Jio, $65 billion for O2C, $20-30 billion for new energy and no conglomerate discount.

UBS

• Keeps ‘buy’ with a target price of Rs 3,150.
• A longer-than-expected delay in refining and petrochemical projects could impact Reliance’s refinery and marketing volumes and earnings.
• Positive contribution from petcoke gasifiers are upside risks to refining margin estimates.
• A faster-than-expected ramp-up of the fibre business would enhance Reliance’s digital earnings further.
• Stalling of consumer migration from unorganised to organised retail could be a key risk to its retail business.

Motilal Oswal

• Keeps ‘buy’ on the stock with a target price of Rs 2,880 apiece.
• Reliance’s ambitious plans across business verticals could create the next engine of growth over the next two-three years with large technological advancement and ambitious growth targets. However, it could dent the existing single-digit return ratios in the near term.
• Expects the conglomerate to clock consolidated revenue/Ebitda of 13%/15% CAGR over FY22-24, without factoring any incremental growth from 5G capex, new energy and other segments.
• Values refining and petrochemical segment at an FY24 EV/Ebitda ratio of 7.5x.
• Ascribes an equity valuation of Rs 1,027 per share to Reliance Jio and Rs 1,202 apiece to Reliance Retail, factoring in the recent stake sale.
• Higher EV/Ebitda multiple of 41x for retail and 19x for digital services underscore new growth opportunities in the digital space and steady market share gains.

Kotak Institutional Equities

• Maintains ‘buy’ on the stock with fair value Rs 2,980, while retaining a constructive view.
• Large capex plans in Jio, oil-to-chemicals and new energy will impact near-term free cash flows, but overall these should be value accretive as new capacities come online.
• In oil-to-chemicals business, sustaining export tax on diesel and aviation turbine fuel is disappointing, still the overall impact is low after the exemption of SEZ refinery.
• Sees upside risks to O2C earnings with regional refining margins elevated.

Systematix Institutional Equities

• Reliance, with an aggressive capex plan of $45 billion in three business segments, excluding other capex, would once again increase its leverage despite the $8.4 billion of operating cash flow.
• However, its muted return ratios of 7% to 8% need to be closely monitored after the newly announced investments.
• The stock currently trades at a PER of 19x and EV/Ebitda of 11x on consensus FY24E.
• The brokerage has no recommendation on this stock.

Bloomberg