New growth opportunities, high debt risk: How analysts interpret RIL's AGM

Analysts said that though the company is set to embark the journey of new growth opportunities in telecom, and new energy areas, it may lead to increase in near-term debt, and weaken the return ratios

Future growth strategies spelt out by Reliance Industries' chairman Mukesh Ambani at the company’s 45th Annual General Meeting (AGM), will help the company embark the journey of decadal growth opportunities in telecom, and new energy areas, analysts said. The required capital expenditure, however, may lead to increased debt in the near-term, and weak return ratios.

"Recent transactions to purchase technology, as well as investment plans for new energy, should kick-start another engine of growth, but will likely require investment in the interim. Besides, while e-commerce is gaining momentum, it is yet to achieve meaningful scale. Thus, the burden of revenue growth will fall on subscriber additions (in the telecom vertical) and, in the interim, the company will have to spend on 5G capex," said analysts at HSBC.

All this, the brokerage said, will likely weigh on the stock performance in the near to medium term. Reliance Industries' shares advanced 1.6 per cent to end at Rs 2,639 apiece on the BSE on Tuesday, as against 2.7 per cent rise in the benchmark S&P BSE Sensex.

Outlining the company's targets over the next couple of years, Mukesh Ambani said the country's most valuable company would aim to double its market value by 2027, the year RIL celebrates its golden jubilee. 

Besides, he said the company will invest Rs 2 trillion in the roll-out of a standalone 5G network, Rs 75,000 crore in expanding its O2C (oil-to-chemicals) capacities across value chains, and Rs 75,000 crore in new energy as announced last year.

Here's how brokerages interpret the AGM announcements:
 

JPMorgan | Overweight | Target: Rs 3,065

The AGM laid out plans for the company's next phase of growth with focus clearly on new energy, petrochemicals, and 5G. RIL's granular details about each business gives comfort on stability across verticals. With AGM behind us, focus will shift to earnings growth.

Jefferies | Buy | Rs 2,980

We incorporate higher capex and earnings upside from Jio and O2C verticals as the new growth-plan blueprint outlined Rs 2 trillion investment in 5G and Rs 75,000 crore in brownfield O2C capacities. 

UBS | Buy | Rs 3,150

We believe Reliance Industries' near-term debt will rise as it gets aggressive in its investments across verticals. That said, definitive timelines and details on potential opportunities across various businesses will keep concerns off the table.
 

Kotak Institutional Equities | Buy | Rs 2,980

In O2C business, while continuance of export tax on diesel and aviation turbine fuel (ATF) is disappointing, the overall impact is low after the exemption to special economic zone (SEZ) refinery. With regional refining margins elevated, we see upside risks to our O2C earnings. In our view, while large capex plans in Jio, O2C and New Energy will impact near-term free cash-flows, overall these should be value accretive, as new capacities come online.  

JM Financial | Buy | Rs 2,950

The company believes that the New Energy business will provide a huge decadal growth opportunity as the world needs yearly investment of $5 trillion to decarbonise the world. Further, it announced a new Giga factory for Power Electronics.
 

The company also announced plans to enter the FMCG business, focusing on high quality affordable products for daily needs. 

Though continued high capex is a key near-term concern, we maintain BUY given RIL's industry leading capabilities across businesses.

Motilal Oswal Financial Services | Buy | Rs 2,880

Retail, Telecom, and New Energy can be the next growth engines over the next two-to-three years, given the large technological advancements and ambitious growth targets. However, the same can dent its existing single-digit return ratios in the near-term.
 

We value the Refining and Petrochemical segment at an FY24 EV/EBITDA ratio of 7.5x, arriving at a valuation of Rs 721/share for the standalone business. We ascribe an equity valuation of Rs 1,027/share to RJio and Rs 1,202/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiple of 41x for Retail and 19x for Digital Services, underscore new growth opportunities in the Digital space and steady market share gains.