Why investors are not thrilled about RIL’s big AGM announcements

Announcements made by Reliance Industries Ltd. (RIL) on its growth plans at the company’s 45th annual general meeting (AGM) held on Monday has drawn lukewarm response from investors, with shares rising about 0.5% over two days.

As such, the AGM announcements failed to provide meaningful triggers for the stock, even as they make for growth engines in the longer run. Also, given the massive capital expenditure (capex) plans, there is worry on the impact on free cash flows (FCF).

“The sharply higher capex reinforces our cautious stance on returns from the business, with muted FCF yield, depressed return ratios and strong multiples limiting upsides from here,” said analysts from ICICI Securities Ltd in a report on 30 August.

RIL’s aggressive plans for Jio/O2C (oil to chemicals) and green energy create a clear roadmap for growth over FY22-27E, they added. The broking firm has made minor reductions to RIL’s FY23-24E earnings per share by about 1% and target price by about 2% to factor higher capex and hence, higher depreciation and interest costs.

For Jio, RIL has planned a capex of ₹2 trillion, aiming for 5G rollout across key cities by Diwali and expanding footprint by December 2023. Peer, Bharti Airtel Ltd has also announced its plan to launch 5G 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 from HSBC Global Research.

Further, in the O2C 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, social and governance (ESG) scores. “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 per our estimate,” said analysts at Jefferies India in a report on 30 August.

To be sure, prior to the AGM, shares of RIL had risen about 8% over a month in anticipation of concrete announcement. “Investors may have been more excited had timelines for the IPOs (initial public offerings) been provided,” said an analyst with a foreign broking firm, requesting anonymity.

RIL’s chairman and managing director, Mukesh Ambani, told shareholders that he will update on the listing of its retail and telecom businesses next year.