New Energy another multi-decade growth engine for RIL: Goldman Sachs

Reliance Industries’ (RIL’s) approach to net zero emissions with a hyper integrated model spanning solar battery and hydrogen value chain has caught the attention of most analysts. In a December 7 report, analysts at Goldman Sachs have reiterated a 'buy' rating on the stock with a 12-month target price of Rs 3,185 - up nearly 34 per cent from the current levels.
 
The global research and brokerage house sees RIL as India’s largest ‘greenabler’ with their new energy capex ratio being one of the highest amongst large energy peers. The New Energy business segment, Goldman Sachs believes, is another multi-decade growth engine for RIL. The company has an aggressive target to reach net zero emissions by 2035.
 
Sustainable earnings recovery momentum in each division, new digital product launches, and more details from management on RIL’s new energy business roadmap, Goldman Sachs believes, are the three key catalysts that will drive Mukesh Ambani-controlled RIL's fortunes in the years ahead.

Click here for RIL's earnings estimates (Source: Goldman Sachs)
 
"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," wrote Nikhil Bhandari, Vinit Joshi, Ethan Liu and Shawn Shin of Goldman Sachs in the December 7 note.
 
On Monday, RIL raised $736 million in green loan to fund the acquisition of solar panel maker, REC Solar Holdings. This will be the first such financing for the company. Earlier in October, RIL announced acquisition of a 40 per cent stake in Sterling and Wilson Solar, a Shapoorji Pallonji group.
 
Going ahead, Goldman Sachs sees a significant expansion in TAM for solar, battery and hydrogen manufacturing globally as well as in India and expects RIL to generate earnings before interest, taxes, depreciation and amortisation (EBITDA) of $3.6 billion / $12.2 billion by FY30/FY40 (base-case projections).
 
As a strategy, Goldman Sachs expects RIL to focus first on the domestic markets given tariff and non-tariff protection, capex incentives and demand creation through regulatory support. India’s renewable installed capacity (around 100 GW currently, of which nearly 45 GW is solar), analysts at Goldman Sachs said, is likely to double by fiscal 2025-26 (FY26) and double again by FY31 with solar accounting for around 260 GW.

Click here for RIL's margin estimates (Source: Goldman Sachs)
 
In the medium-term, however, Goldman Sachs expects the Mukesh Ambani-controlled company's focus to shift to exports once cost structure benefits from hyper integration kick in and RIL positions itself as net zero supply chain enabler.
 
"We note returns for new energy investments to be materially higher than old energy albeit lower than Chinese players given lack of local supply chain. We ascribe a discounted cash flow (DCF)-based value of $48 billion in our bull-case scenario to RIL’s New Energy segment, making up 62% of their current oil to chemical (O2C) business segment," Goldman Sachs said.
 
As regards the telecom business vertical, Reliance Jio, following its peers Bharti Airtel and Vodafone Idea (Vi), recently hiked its prepaid tariff plans by around 20 per cent across the board (including around 21 per cent in base JioPhone level plans). The new tariff comes into effect starting December 1.
 
“Post the tariff changes, on an absolute spend basis, 2G feature-phone users, low-end JioPhone users and high-end JioPhone users will have to spend 2.6x-4.4x more over a 24-month period to upgrade to JioPhone Next,” analysts at Jefferies had said in a recent note while keeping the 12-month target price for the stock at Rs 3,400 levels in their best-case scenario.