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Why RIL investors are still unconvinced of Mukesh Ambani's hydrogen foray

Mukesh Ambani's new-energy ambition is even more complex than his telecom foray, which triggered a long period of debt-fueled expansion

Mukesh Ambani

Mukesh Ambani (Photo: Bloomberg)

Bloomberg
By Andy Mukherjee

What Asia’s richest man considers his life’s “most challenging” mission has left the stock market unconvinced, nervous — or both.
 
In June 2021, Mukesh Ambani committed $10 billion to clean power and fuel. After India made a surprisingly bold pledge in December that year to switch to non-fossil-fuel sources for half of its energy needs by the end of the decade, the tycoon upped his green wager sevenfold.

Yet, shares in his flagship Reliance Industries Ltd. are currently valued at 24 times profit, sharply lower than the price-to-earnings multiple of 37 in 2020. Back then, Ambani was raising billions of dollars from Facebook Inc., Alphabet Inc. and Silver Lake Partners for his digital and retail ventures, making his balance-sheet shockproof against Covid-19.

With the pandemic over, the conglomerate is experiencing a fresh growth spurt across business lines. The 19% surge in March-quarter profit beat analysts’ estimates, while the 37% boost to capital expenditure showed that Ambani is again in expansion mode. Yet, green technologies — the centerpiece of the strategy — aren’t getting much attention. Either investors don’t believe that India is ready for a hydrogen revolution, or they’re worried the group will overstretch its finances in chasing the rainbow.

The current share price is reflecting no value whatsoever for the new-energy business, according to Goldman Sachs Group Inc., whose base-case estimate is that it should be worth $29 billion. Under the bank’s more bullish assumptions — such as a 50% share of India’s hydrogen market for Reliance by 2050 — that figure rises to $48 billion.

It isn’t that investors have to wait for a quarter century to test the thesis. There’s bound to be a more immediate impact on earnings from repurposing old-energy assets. Reliance’s oil-to-chemicals, or O2C, unit is one of the world’s biggest consumers of dirty or gray hydrogen, extracted from petcoke, a heavy refinery residue. The near-term plan is to gasify the petcoke to produce less-polluting blue hydrogen, with the carbon released in the process captured and stored. Transforming legacy O2C into a “sustainable, circular and net-zero-carbon” business “shall generate growing returns over decades” by extending the economic life of existing assets, Mumbai-based Nuvama Wealth Management Ltd. says.
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Will this be enough, though? Yes, Ambani might hit his goal of making blue hydrogen from syngas — a combination of hydrogen and carbon monoxide — at a competitively priced $1.2 to $1.5 per kilogram. But large-scale production of green hydrogen by using renewable energy to split water molecules, and realizing Ambani’s vision of “1:1:1,” a price of $1 for a kilo over a decade, looks like a tall order. Globally, green hydrogen costs between $6 and $7. That renders it uncompetitive as an industrial feedstock and fuel against both gray and blue variants. The only way it comes up ahead is with rising carbon prices in Europe — and then, too, by only 2035, according to the CRU Group, a commodity research firm.  

Reliance is aiming for 100 gigawatts of solar-power installations by 2030. That’s a big chunk of India’s overall goal of 450 gigawatts, a sevenfold increase from last year. It’s also investing in electrolyzer manufacturing, fuel cells and energy storage, including a sodium-ion technology that could work out cheaper than the lithium-ion batteries used in electric vehicles. 

To analyst Jal Irani and his colleagues at Nuvama, the green-energy gamble is reminiscent of Reliance’s bet on polyesters in the 1980s, petrochemicals and refining in the 1990s and 2000s, and telecom and retail in the previous decade. But there’s one crucial difference. This time around, Reliance “has identified an industry that not only has great potential, but is relatively new globally as well,” they wrote recently.
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That explains why investors are skittish. Ambani upended India’s telecom business with scorched-earth pricing: free voice calls and the world’s cheapest data costs. To gather more than 400 million customers, he had to pick the right technologies from around the world and assemble them into Jio, his 4G service, in a supportive policy environment. By comparison, switching a largely fossil-fuel-powered economy of 1.4 billion people to yet-unproven green hydrogen is a far more adventurous undertaking. While the Indian government will support the transition, it simply can’t match the subsidies that the US is throwing at its clean H2 pioneers to help them cut the price for consumers by half. 

If this wasn’t daunting enough, shareholders also have to worry about a changing of the guard. When Ambani began to give shape to his telecom venture in 2010, he had just turned 53. The billionaire is 66 now, and in the process of handing over control of the empire to his three children. While the older Ambani and his trusted consigliere Manoj Modi have a track record of executing complex projects, the next generation is yet to convince the market that they, too, have the chops. Including supplier credit and telecom-spectrum liabilities to the government, net debt is 1.4 times EBITDA, which Goldman says is low compared with the average of 3.2 during the previous capital-expenditure cycle of 2013 to 2017. Macquarie Capital, however, is calling attention to the 64% jump in interest expense in the March quarter. 

It's all a bit too much for the market to process. By contrast, Ambani’s ambition to create a borrowing platform for merchants and consumers — and taking it public separately — is both a simpler story and a surer bet. It could put some zing back in the Reliance stock by unlocking value from the group’s rising heft in telecom, media and e-commerce data. Climate technologies will be a different game altogether. Getting investors to rally behind Ambani’s most challenging mission yet is going to take more work.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper

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First Published: Apr 26 2023 | 7:16 AM IST

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