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RIL’s fourth investment cycle will end with $60 billion in value creation, says Morgan Stanley

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  • RIL is now entering its fourth capex cycle, Morgan Stanley says.
  • It has pledged a massive 75,000 crore (about $9.4 billion) investment in the new energy ecosystem.
  • RIL’s investment cycles have generated 2-3x shareholder value over the past two decades, says Morgan Stanley.
  • “We see value creation of $60 billion in the new energy sector through 2025,” the report said.
  • However, if refining margins are hit, Reliance’s annual debt will increase by $3 billion a year and affect cash flows.

Trust has always grown big – and every capex cycle it undertakes is bigger and ‘newer’ than the last. The oil-to-telecom-to-retail major is now entering its fourth investment cycle, according to Morgan Stanley, after the company pledged a massive 75,000 crore (about $9.4 billion) investment in a new energy ecosystem.

RIL chairman Mukesh Ambani said it was the most ambitious ever at the 45th annual general meeting.

In its latest report, Morgan Stanley says that every time RIL has reimagined its company, it has outperformed investors’ expectations.

“Over the past two decades, investment cycles have broken down at about two to three times the value creation for shareholders, creating about $60 billion in market cap each decade,” the report said.

This fourth cycle will also quickly yield a higher value as the new energy spindle is integrated with the chemical activities and its own large internal use.

“RIL’s integrated approach to solar panels and mobility/storage batteries, and its focus on providing an alternative to China, stands out and we see up to $60 billion in value creation in the new energy sector by 2025. We are increasing our base value for new energy to $32 billion to accelerate revenue generation,” the report said.

RIL, a net energy consumer at Jamnagar, will make the green choice by building more solar and green hydrogen projects that can help reduce its own energy costs. Moreso will also focus on producing high value added chemicals from its petroleum coke gasifiers.

It will also enter the engineering, procurement and construction business for panel sales and panel sales with solutions based on multiple technology investments to global customers.

“We estimate that the company will contribute to approximately $1 billion in EBITDA by 2027,” the report said.

How have the past RIL capex cycles worked?

From 1997 with the commissioning of the Jamnagar refinery, RIL has gone through three major investment cycles so far. These relate to gas fields at KGD6, the expansion of Jamnagar in 2012 and the major re-entry into telecom.

While they created value, this did not come without costs to the organization in the form of depreciation, impairments and challenged capex.

“In each capex cycle, RIL also had its share of challenges, such as the write-off of investments for petcoke gasifiers, telecom spectrum and upstream shale investments,” the report said.

RIL had invested in three shale gas assets in 2010 and 2013, but exited them in 2017. In addition to investing in KGD6 block at Krishna Godavari, which produces over 25mmscmd of gas, RIL has also invested over the years in the Cauvery and Cauvery basins. mahanadi. .

RIL also had to rearrange its retail investment between 2006-2010 and emerged stronger in 2015-16, the report said.

RIL capex that was challenged

Year Challenged capex
FY03-FY10 $12.5 billion upstream exploration and production – Includes $2.7 billion impairment on shale investments
FY12-FY16 $8 billion capex in petcoke gasifier
FY18 $2 billion spectrum depreciation
FY22 Impact of $4 Billion on Gasifier’s Value During Divestment

Source: Morgan Stanley

Telecom and retail companies ‘set up’

Morgan Stanley believes the timing for new energy investment is right. The other activities are winding down and are expected to wind up faster in the future.

After kick-starting the company with “free data” and still keeping the tag of offering the cheapest data offering, Jio is about to reap the rewards.

Telecoms has become a three-player market, and the report expects average revenue per user to grow by more than 50% over the next four to five years. That means Jio’s earnings could grow to 1.6 times the FY22 level. It also expects its 5G investments to generate revenue faster than 4G.

The biggest benefit of new energy investment is global and national support as India pledges to move to net zero emissions by 2070. However, green hydrogen, solar panels and battery technology are a rapidly evolving sector with new changes on the way.

“Policy support in this cycle is also increasing for the new energy industry and the government recently passed a bill in parliament to increase the use of alternative fuels, provide incentives for investment in new energy and the start of carbon trading also points to a rising trend. total addressable market for RIL – something we saw less in previous cycles,” the report said.

But there is a catch. In order for its new energy business to run smoothly, RIL must maintain its refining business. Refined margins fund nearly a third of RIL’s investment plans and if margins were to fall to low because the company is cyclical, it will reduce operating cash flows by 20% and increase annual debt by $3 billion, according to the calculations. from Morgan Stanley.

“While cycle-low gross refining margins are unsustainable because there would be a supply response, we see a 15% net impact on our NAV as RIL would also see its multiple reduction,” the report said.

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