Reliance Industries India’s Largest ‘Greenabler', Says Goldman Sachs; Ups Price Target
Goldman Sachs sees Reliance Industries Ltd.’s clean energy business as its third structural growth driver, besides retail and telecom, as the global investment bank reiterates ‘buy’ and raises target price on the billionaire Mukesh Ambani-controlled conglomerate.
“RIL is adopting a unique manufacturing approach to net zero emissions with a hyper-integrated model spanning solar, battery and hydrogen value chain,” Goldman Sachs said in a report dated Dec. 7. “We see RIL as India’s largest ‘greenabler’. Its new energy capex ratio is one of the highest among large energy peers with an aggressive target to reach net zero emissions by 2035.”
India’s largest company by market value plans to build solar photovoltaic panels, batteries, hydrogen fuel cells, and electrolysers over the next three years. The plan comes as companies and investors globally switch to sustainable investments to curb greenhouse emissions. Morgan Stanley, in its October report, had said new energy is expected to pivot RIL into a global alternative technology supplier as it intends to be an “enabler more than a producer” of electrons and green molecules.
Goldman Sachs, too, expects the target market for solar, battery and hydrogen to expand significantly in India as well as across the globe. Still, RIL is likely to focus first on the domestic markets given tariff and non-tariff protection, capex incentives and demand creation through regulatory support, the report said. “Medium term, we expect it to move to exports markets once cost structure benefits from hyper-integration kicks in and it positions itself as net zero supply chain enabler.”
Returns for new energy, it said, is materially higher versus old energy while cost of capital is materially lower, implying significant value creation.
“We expect solar to drive bulk of the capex related to new energy business in the near term… We expect India’s renewable installed capacity (100 gigawatt currently, of which about 45GW is solar) to double by FY26 and double again by FY31, with solar accounting for nearly 260GW,” the financial services provider said.
RIL’s battery investment, the report said, will materialise over the medium term, taking precedence after solar investments to match the pace of domestic downstream demand. “We expect India’s battery demand to grow from 2 GWh in FY22 to 52 GWh in FY30 from rising EV penetration and battery attach rate for grid power.”
It expects RIL’s hydrogen-related capex to become meaningful closer “to the end of this decade”.
Overall, Goldman Sachs pegs RIL’s Ebitda at $3.6 billion by FY30 and $12.2 billion by FY40. “We ascribe a discounted cash flow based value of $30 billion in our base and $48 billion in bull case scenario to RIL’s new energy segment, making up 39%/62% of its current oil-to-chemical business segment.”
The investment bank raised its 12 months sum-of-the-parts-based target price for RIL by 12% to Rs 3,185 apiece. It also sees three catalysts for RIL’s further share price outperformance:
Sustainable earnings recovery momentum driven by retail (footfall/stores normalisation), telecom (tariff hike likely before CY21) and energy.
New digital product launches such as an Android phone (to sustain subscriber growth momentum) and electronics category in e-commerce.
More details from management on RIL’s new energy business road map.
“These catalysts should drive strong earnings growth of 41% CAGR over FY21E-23E (16% ahead of Bloomberg FY23 consensus), on our analysis, and a favourable risk reward,” Goldman Sachs said.
Goldman Sachs has also highlighted risks to its estimates and target price. A few of them are:
A slower-than-expected commercial ramp-up due to technology would drive downside risk to volume/earnings forecasts, including the export segment.
The biggest challenge for the pick-up in India’s renewable demand lies in the policy framework and transmission infrastructures. Any material delay or lack of follow-through in execution would likely lead to lower market size and drive downside to earnings forecast.
Higher-than-expected leverage/interest cost may lead to lower profitability.
Lower-than-anticipated capacity additions could significantly impact the company’s growth.
Higher-than-expected competitive intensity can drive lower-than-expected ARPU, impacting the profitability of the telecom business.
Higher-than-expected competitive intensity and unfavourable regulations in the retail business could drive lower market share and margins versus our assumptions for offline and online retail business.
Delay in new launches and lower-than-expected pick-up of new products could drive downside risks versus our forecasts.