Cover story: Inside Mukesh Ambani's green gambit

At present, Reliance’s valuation is a mix of a low multiple for the hydrocarbons business as well as higher terminal values ascribed to telecom and retail. The company trades at a 31 times multiple at a market capitalisation of ₹14,00,000 crore. Its return on equity is 8 percent and the stock has given investors a return of 17 percent over the last year. 

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For now, only the broad contours of the plan have emerged. Analysts Forbes India reached out to declined to talk about specifics as they are still awaiting clarity on how the ₹75,000 crore will be allocated and the cash flows it can produce. It also remains to be seen how government policies support the adoption of solar in India’s energy basket. Anant Ambani joined the boards of Reliance New Energy Solar and Reliance New Solar Energy—the two companies through which investments would be made.

There has been no increase in the sum of the parts valuation (hydrocarbons, retail and Jio) of Reliance Industries. But analysts also point out that the company’s execution capabilities can’t be underestimated. There was a fair amount of scepticism over VoLTE (Voice over Long-Term Evolution) technology when it was deployed for Jio, but it worked eventually.

The Green Energy Plan

A large part of the green energy rollout would be in the solar space. Here the technology is reasonably mature and it provides an opening for the company to reduce India’s imports from China. The company plans to build four gigafactories in Jamnagar. For the production of solar energy, there are plans to construct a solar photovoltaic module factory. Think of this as the solar panels we often see in pictures. They’d convert raw silica into poly silicon and then to wafers that would make solar cells and then the modules. This would give them the benefit of full backward integration.

The Indian market for solar modules is dominated by Chinese imports with some Indian players like Vikram Solar and Waaree catering to the domestic market. A key use of these would be in the market for rooftop and distributed solar applications. While these markets are small and fragmented, Reliance’s commitment to set up 100 GW of manufacturing capacity by 2030 has the potential to dramatically increase usage.  

While companies like Tata Power have been trying to increase adoption for the last decade, they haven’t managed to achieve scale. Mass adoption of solar rooftops would require government policies to nudge people in that direction. From the announcements, it is clear that the company intends to deal with consumers and not institutional clients. “Expect some big bang initiatives in distributed solar,” says Rustagi.

The company has made no announcement on getting into the power generation space. “It doesn’t want to deal with discoms,” says Jyoti Gulia, founder of JMK Research and Analytics.

Reliance’s and Indian companies’ plans tie in with the government’s attempts to keep Chinese manufacturers out of the Indian market. From April 2022, there will be an imposition of 40 percent basic customs duty on solar modules and 25 percent on solar cells. This should give a fillip to Indian manufacturing. But with the imposition of these duties, Gulia says there is a fear that lower-quality products may flood the Indian market until Indian supply comes on stream.

Second, for storage of intermittent energy, the company plans to set up a battery manufacturing facility. The market is unclear whether these batteries would be of the sophistication required for electric vehicles or whether they would be for supplying electricity during times when solar or wind power is not available. If it is the latter, producing on a mass scale is a lot easier and it can even be done from batteries that are pulled out of electric vehicles after the 3,000-charge cycle is over. “We are exploring new and advanced electrochemical technologies that can be used for such large-scale grid batteries to store the energy that we create,” Mukesh Ambani said at the meeting.

Lastly, there is the production of hydrogen and electricity from hydrogen and oxygen. This would be done through electrolysers. The technology here is still at a nascent stage and energy intensive. Getting it to work at scale at a low capital cost will be a key challenge. The modalities of transporting this would also have to be worked out.

In the next decade, business models predict that these hydrogen fuel cells would power cars, aircraft and ships as well as data centres, telecom towers and micro grids. If Reliance manages to produce hydrogen at scale, it could emerge as a leader in this area.

Retail and Jio

Over the last year, Jio Platforms and Reliance Retail have raised ₹1,52,056 crore and ₹47,265 crore from investors respectively. As India stayed at home, both businesses benefited—increased telephone and broadband usage at home and more deliveries through JioMart. The increasing opportunities for both businesses should continue this year.

At ₹1,57,629 crore, Reliance Retail is now India’s largest retailer by turnover. The company operates 12,711 stores across the country and has a lock on prime real estate across malls and high streets. This makes it harder for competitors to enter. The company has also acquired Big Bazaar which is pending regulatory approval as well as the resolution of a court case with competitor Amazon, which contends that it has the right of first refusal of any sale of Big Bazaar.

At ₹1,57,629 crore, Reliance Retail is India’s largest retailer by turnover

Image: Niharika Kulkarni / Reuters

The next battleground is likely to be grocery delivery with Amazon, Flipkart, Tata-BigBasket and DMart slugging it out for a slice of a market valued at between $10 billion and $25 billion. Across large cities, vans delivering everyday items are now a staple feature as companies build their databases of customer profiles.

Reliance has alluded to broad-basing its partnership with Facebook-owned WhatsApp to allow consumers to order through the app as well as make payments. A formal launch of the service has not yet happened. JioMart delivers 5,00,000 orders a day, according to information released in December 2020.

Anant Ambani is on the boards of two Reliance solar energy companies

Another venture that remains to be scaled up is bringing kiranas into the Reliance Retail fold. Not only would this allow the company to deliver orders from neighbourhood stores, it would also get them on-boarded as customers, allowing Reliance Retail to play the role of a distributor. This on-boarding is happening in 13 cities. Details of how many merchants have signed up are not available.

Jio Platforms ended FY21 as the largest operator in India with 426 million subscribers, up by 99 million users. It is the number one operator in all circles except Kerala, Karnataka and Tamil Nadu. The company reported an average revenue per user of ₹138 and started preparations for the rollout of its 5G service. (Spectrum auctions for 5G are yet to happen). Net profit in Q4FY21 was ₹3,508 crore.

Valuing Reliance

As the fossil fuel era fades away, Reliance is also diversifying its hydrocarbons business to produce specialty chemicals. The petrochemical industry forms the feedstock for this space and the company as well as government oil companies have a lock on the raw material. These can either be sold in the raw distillate form or converted to chemical compounds.

The chemistry for these compounds is complex, but once got right, there are usually only two to three suppliers the world over. Globally, there is also a move to supply from Chinese manufacturers and Indian specialty chemical companies have benefited from the China +1 strategy. Companies like SRF, Atul, IG Petrochemicals quote in excess of 30 times earnings. Once the oil-to-chemical business kicks off, expect a higher multiple for the parent Reliance Industries.

Over the last year, Reliance Industries has become net debt free. This gives it the flexibility to raise additional sums for future investments, although it is possible it could fund a capex of ₹75,000 crore from internal accruals. At the 2019 AGM, Ambani had declared that Jio’s investment cycle was over. With 5G auctions due and infrastructure investment in telecom, that cycle could resume again. The battle for grocery delivery across India, which holds a lot of top line promise is likely to cause a dent to the bottom line.

Simply put, India’s largest private sector company will embark on a new spending cycle. For now, analysts aren’t sure what to make of it as the market for solar modules is fairly commoditised. That is one reason why despite the promise of the green energy business, the market hasn’t ascribed any additional valuation to the company. In the fortnight since the AGM, the market cap has hovered at ₹14,00,000 crore.

(Reliance Industries Limited is the owner of Network18, publisher of Forbes India)