As RIL aims big, investors have eye on risk
3 min read 30 Aug 2022, 10:51 PM ISTReliance Industries has announced huge capex plans for 5G roll-out and expanding O2C capacities
PremiumShares of Reliance Industries Ltd (RIL) fell by 0.8% on Monday, the day the company laid out ambitious growth plans at its 45th annual general meeting (AGM). The stock rebounded on Tuesday, closing 1.6% higher on a day the benchmark Nifty50 index rose 2.58%.
Significant announcements were made at the AGM, though meaningful triggers from a near-term perspective seemed missing. RIL’s shares had risen about 8% in the one month prior to the AGM, perhaps in anticipation of news flow on value unlocking updates in the meeting. “Investors may have been more excited had timelines for the initial public offerings (IPOs) of the retail and telecom businesses been provided," said an analyst requesting anonymity.
According to a Moneycontrol news report, responding to shareholders questions, RIL’s chairman and managing director, Mukesh Ambani, said that he will provide updates on listing of the retail and telecom businesses next year.
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In Jio, RIL has planned for a total capital expenditure (capex) of ₹2 trillion for the roll-out of its 5G plan. It will launch Jio 5G in key cities by Diwali and expand its footprint by December 2023. Peer Bharti Airtel Ltd has also announced its plan to launch 5G services by October.
“RIL’s plan is also in line with competition. However, it will require rapid investment in 5G infrastructure and given the limited use cases available, the ability to drive adoption will be a key test for RIL," said analysts at HSBC Global Research.
Further, in the O2C (oil to chemicals) business, RIL plans to invest ₹75,000 crore over the next five years to expand capacities in existing and new value chains. The company’s plans in the New Energy vertical would hold it in good stead in terms of costs and environment, and social and governance (ESG) scores. RIL’s FY22 annual report states, “This new growth engine holds great promise to outshine all our existing growth engines in just 5-7 years." This would help RIL achieve net zero carbon emission status by 2035.
“Aside of the ₹75,000 crore ($9.4 billion) in the five giga factories, the captive solar generation could require $12.5 billion capex per our estimate. This could lower RIL’s power costs by about $1.4 billion annually according to our estimate," said analysts at Jefferies India in a 30 August report.
In the retail business, the company has launched JioMart on WhatsApp. Investors will keep a close eye on execution on this front. Also, RIL would enter the fast-moving consumer goods (FMCG) sector. “We see no meaningful near-to-medium-term impact on our FMCG coverage as brands are created over decades and are well-entrenched. But we will watch out for more details and any signs of a disruption," said a report by BNP Paribas.
Meanwhile, Ambani said that his children, Akash and Isha, assumed leadership roles in Jio and retail, respectively, while Anant has joined the New Energy business. This was on expected lines.
Announcements at the AGM point towards high capex levels over the next few years, which could be a disappointment for investors. “On the one hand, the investment programme would aid growth in the long run and play out constructively; on the other, in the near-term, higher capex could impact free cash flow and return on capital," said Nitin Tiwari, analyst at Yes Securities.
Jefferies has raised its capex estimates for FY23/24/25E to ₹1.59/1.55/1.59 trillion respectively to factor in higher capex in Jio, conventional O2C and New Energy businesses. RIL’s expansion plans come at a time when worries about a potential global recession are looming. This poses a risk to its earnings in future.
With the AGM getting over, investor focus now shifts to earnings.
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