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There is never a dull moment with Reliance Industries Ltd (RIL) shares. They fell in two consecutive trading sessions, after the announcements at its 44th annual general meeting (AGM), a 4.5% decline.

While high expectations ahead of the AGM were one factor, analysts and investors are also worried about the higher-than-expected capital expenditure (capex) plans. At the AGM, RIL said it will invest 75,000 crore for its new renewable energy business over the next three years. Naturally, this would increase capex and some worry it would dampen the free cash flow (FCF) outlook.

“FCF outlook remains suppressed against expectations of a material sustainable turnaround," said analysts from Macquarie in a report on 25 June. The brokerage added that RIL has not seen sustainable FCF generation over the past 15 years and the measure stands at a record low negative $11 billion in FY21. “We have increased our FY22-25 capex (average $12 billion per annum) by about 20% to reflect investments in the newly announced new energy materials business," said Macquarie analysts, adding, “On our forecasts, RIL remains FCF negative for the foreseeable future."

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Of course, Macquarie is at one end of the spectrum considering its capex outlook is around 50% higher than consensus estimates. It must be noted though that many brokers haven’t yet revised their capex estimates upwards after the AGM. True, the scale of RIL’s renewable energy plans is far lower than its telecom business’ mega capex. Nonetheless, the risk of overshooting capex remains.

At the AGM, chairman Mukesh Ambani said the conglomerate intends to produce 100GW solar power by 2030. Overall, the new energy plans are expected to help the firm achieve its vision of becoming net carbon zero by 2035. On the brighter side, RIL’s new energy focus should improve its environmental, social and governance scores. To be sure, it’s not only RIL’s energy plans that can weigh on the capex outlook, but also its digital ambitions. Ambani said RIL is confident of being the first to launch full-fledged 5G services. “Even though timelines for 5G auction are uncertain, (Reliance) Jio’s emphasis on 5G suggests that it may buy 5G spectrum sooner rather than later. This could drive an earlier-than expected 5G capex cycle which does not bode well for FCF/ROCE profile of the sector, but may consolidate the market further," said analysts from Jefferies India Pvt. Ltd in a report on 24 June. ROCE is return on capital employed.

BofA Securities sums it up, “The capex investments, coupled with investment in 5G, will likely push RIL away from its recently achieved zero net-debt position to a slight debt position (<1 times net debt/Ebitda)." Ebitda is earnings before interest, tax, depreciation and amortization.

High capex, by itself, isn’t seen very negatively—after all, the high initial capex in Jio has resulted in huge returns for shareholders. However, since the value of a firm is ultimately the value of its cash flows, investors were hoping that cash registers would start ringing consistently with Jio’s capex tapering off. They may now need to be prepared to wait more. High investments also depress return ratios —RIL’s return on capital last year stood at 7.5%, according to Jefferies, and will range between 7% and 8% in the next two years, the broker estimates. To be sure, while RIL shares are lately under pressure, investors can hardly complain, considering the shares have outperformed meaningfully post-covid, thanks to the firm’s large fund raising and deleveraging efforts.

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