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Why did Mukesh Ambani’s mega announcements leave investors cold?

RIL Chairman Mukesh Ambani addressing 44th AGM of Reliance Industries through video conferencing, in Mumbai on Thursday (Photo: ANI)Premium
RIL Chairman Mukesh Ambani addressing 44th AGM of Reliance Industries through video conferencing, in Mumbai on Thursday (Photo: ANI)

  • While RIL has forayed into telecom and retail sectors, it still has a substantial carbon footprint
  • A presence in the green energy biz will improve ESG scores, which is a key factor for some investors

It’s not every now and then that Reliance Industries Ltd (RIL) announces an investment as large as 75,000 crore on a new project. Chairman Mukesh Ambani said at the company’s annual general meeting (AGM) that it will set up four giga factories to create a fully integrated, end-to-end renewable energy ecosystem. The investment would be made over the next three years.

The giga-sized plan to go green was received with a shrug by stock market investors. Reliance shares declined about 2.5%. What gives?

To start with, share price movement on just the day of the AGM isn’t a very good indicator of how investors perceive the company’s plans and performance. As the chart alongside shows, RIL shares typically decline on the day of the AGM, as expectations are generally running high with regards to big announcements. The 2021 AGM, in particular, comes on the back of a sharp rise in the RIL stock, with valuations now being far higher compared to pre-covid highs, thanks to the large fundraising and deleveraging last year.

Great expectations
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Great expectations

“With refining margins being weak, petchem prices lower versus March highs and no visibility of tariff hikes in telecom, there is not much on the operational front to support continued outperformance as seen over the last six weeks," analysts at JP Morgan said in a note to clients ahead of the AGM.

As far as the green energy plans go, an analyst at a domestic institutional brokerage points out that the benefits from the move will be back-ended, and it may take a while for investors to appreciate value that could be derived. “It looks like a positive move, but we need more details before assessing whether the value that will be derived will be greater than the impact on the cash flow as a result of the high capex," he said.

While RIL has forayed into the consumer businesses of telecom and retail, it still has a substantial carbon footprint thanks to its large oil-to-chemicals (O2C) business. A sizeable presence in the green energy business will help offset some of this carbon footprint, which will also help it improve ESG scores that drive the decisions of some institutional investors.

Probal Sen, senior vice-president, research at Centrum Broking, says the investment plans in green energy indicates the company has clear plans of moving away from traditional energy business. “With Ambani indicating that the future of transportation fuel is green, it suggests the firm is clear on moving away from the traditional business, although it will continue with its presence in the O2C segment," he said.

To be sure, RIL has already indicated it wants to cut exposure to the O2C segment by selling a 20% stake to Saudi Aramco. The Street appears to be a tad disappointed that the deal hasn’t yet been concluded, and RIL’s announcement that the tie-up will be formalized this year didn’t exactly calm investor nerves. The delay suggests earlier valuation expectations of $75 billion for the business is still up for negotiation.

Some analysts were disappointed that more details on the affordable smartphone being developed with Google weren’t shared. “While the date of launch has been disclosed, which is nearly three months hence, the specifications of the phone and the pricing is still not known, suggesting some delay compared to earlier timelines," said an analyst at a domestic brokerage.

All told, there weren’t any immediate triggers to drive the stock and with expectations already running high, it seemed like a tall order for the stock to rise further on AGM day.

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