RIL is stepping up capex amidst global uncertainty

30 Aug 2022 , 10:27 AM

Stepping up (growth) capex

RIL announced:

1) Launch of PAN India 5G services by Q3FY24 (metros by Q3FY23)
2) Rs750 billion capex to step up its O2C capacity (PTA, PVC, PET, PFY, carbon fibre) through FY27; by FY26/27, the saleable production is estimated to rise by 20-25%
3) The work on giga factories (Rs750 billion capex) was on track (1^st PV module by 2024)
4) Investment in 20GW RE capacity for internal power consumption
5) Upbeat outlook on retailing business including launch of its FMCG business

It however did not indicate any clear timelines for the proposed demerger of telecom and retail businesses, which was keenly awaited; as such, meaningful immediate triggers seem missing.

Vendor financing may be availed

RIL’s annual OCF (conservative assumptions for O2C business) is estimated at Rs1.1-1.3 trillion pa, well ahead of its annual capex through FY23/24, and to that extent may not witness stress on books; collapse of commodity prices however remains a key risk. Also, very likely that it may try and utilize options such as vendor financing, etc. to part fund the capex. Further, in case it opts to set up the 20GW RE projects for captive use under group captive structure, the upfront investments could be limited; else the return ratios may fall significantly. While RIL’s B2C businesses have strong growth trajectory, its reported return ratios remain poor, largely due to its telecom business.

Collapse in commodity prices – key factor to watch

Analysts at IIFL Capital Services forecast RIL’s consolidated earnings to grow 29% / 14% over FY23/24 respectively where they model:
1) US$10/bbl GRM
2) 16% increase in Jio ARPU
3) Unchanged gas prices, but 27% YoY growth in volumes
4) 22% pa sales growth in organized retailing

Collapse in commodity prices led by global recession at a time when RIL is stepping up growth capex, will be a key risk to the earnings, and cash flows. They have a Buy rating on the stock with a target price of Rs2,873 per share.

Stepping up O2C capacity

RIL will incur Rs750 billion capex to step up its O2C capacity progressively through FY27. In the polyester value chain, it plans to build world’s largest single train PTA plant of 3MMTPA capacity, and 1MMTPA PET plant both at Dahej which are targeted for completion by 2026. While among in the Vinyl chain, RIL is looking to expand its PVC capacity by 1.5MMTPA by 2026 along with other investments to make EDC and PVC at the Ruwais complex in the UAE; with these expansions, RIL will rank among the top-5 producers of PVC globally. Also with its foray into new materials, RIL will build India’s first and one of the world’s largest carbon fibre plants at Hazira with a capacity of 20,000 MTPA.

Analysts at IIFL Capital Services note, polyester consumption in India has seen ~6% pa growth over long term, and to that extent, the capacity addition will allow RIL to participate in the market growth. The investment in PTA plant is in sync with vertical integration (PTA — key ingredient for polyester); further more India is a net importer to PVC, and any capacity addition will help import substitution at a time when local demand is strong. As such these core investments bode well for RIL in medium to long run.

R Retail foray into FMCG segment

Reliance Retail is set to make its entry into the FMCG segment this year and with its continued focus on expanding the store count (2,500+ stores opened in the year), this new initiative will have an added advantage in terms of reaching to the consumers. RIL has grown its merchant base to over 2 million and is set to partner with 1 billion. partners, which should help scale up its Omni channel initiatives as well.
RIL’s focus is on augmenting an extensive supply chain network with a design ecosystem and developing its new businesses. Further, RIL launched Whats app- Jio partnership through which consumers can directly order from Jiomart through Whats App.

E&P business- Solid ramp up ahead

RIL’s plans of solid ramp in gas production in KG D6 remain on track; with the commissioning of the MJ field by Q3FY22; RIL expects the production from KG D6 to increase from 19 mmscmd currently to 30 mmscmd. As per RIL, the increase in gas production will result in import savings of nearly USD 9 billion pa to the country; contributing nearly 30% of India’s total gas production.

New Energy- aggressive plans

RIL’s progress in setting up the ‘Dhirubhai Ambani Green Energy Giga Complex’ in Jamnagar is on track which envisages the company’s aim to establish 100GW of solar energy by 2030; for which it has formed strategic partnerships with some major players globally. In addition to establishing four Giga factories announced in the last year, RIL announced of setting up one more Giga factory for Power Electronics; the company is also actively progressing on bio energy, offshore wind, and other conventional sources of renewable energy. For solar PV manufacturing, RIL is in process of expanding the production capacity of REC (100% stake) from the current 1.2GW pa to 1.8GW pa in Singapore. RIL has also committed to establish 20GW of solar energy generation capacity by 2025 for its internal power consumption.

5-G Rollout — impact on the sector

RIL plans to rollout 5G in key cities by Diwali 2022 while PAN India is targeted by December 2023; it plans to invest Rs2 trillion to set up the 5G network; further, it has set up medium term target to connect 100 million through fixed wireless access (FWA).

On the Rs2 trillion investment, analysts at IIFL Capital Services understand this includes the Rs880 billion spectrum spends in July 2022 auctions. Jio has not mentioned any timeline for the remaining ~Rs1.1 trillion but the capex to achieve pan India coverage by December 2023 would comprise a large chunk of this. IIFL’s telecom team continues to build in ~Rs1.8 trillion 5G investment over FY23-25.

The telecom team further notes that Jio and Bharti have different strategies for rolling out 5G networks. Jio has bid for the pricey 700MHz band keeping standalone (SA) 5G architecture in mind. Bharti on the other hand would stick to non-standalone (NSA) network in the near future and would depend on its ample mid-band spectrum holdings. A key advantage that Jio will have in a year’s time (once its 700MHz network is ready) will be superior indoor coverage (which has been an issue with all telcos so far). This gives Jio a shot at attempting to churn away high ARPU subs from peers. However, 700MHz handset ecosystem will have to improve rapidly. Jio will also have to step up its execution in the market place.