'RIL's New Energy Business Moving Behind Vs Expectations In FY24': Probal Sen Tells | NDTV Profit
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00:00I'm speaking now with Prabal Sen, Senior Research Analyst of Indian Oil and Gas Sector and Institutional
00:05Equities at ICICI Securities.
00:07We'll be joined by Devine Choksi in just a minute, of course, someone who tracks the
00:11company very, very closely.
00:13Prabal, let me come to you on some of the points that Ambit has raised.
00:18And let's talk about new energy because that's something that you look at carefully, where
00:22they say that in 2020, RIL stated new energy will emerge as a growth engine, but there
00:29has been a delay of at least a year in two gigafactories.
00:34Let me come to how the stock has been performing right now and whether you're seeing any signs
00:38of concern.
00:41I think, you know, I would hesitate to comment on what some other broker has written to be
00:46absolutely clear.
00:47I think the author of that report would be better placed to sort of comment on it.
00:52Having said that, I think two or three key concerns that have been mentioned, which is
00:57something that we concur with, is that the cash flow generation from the businesses is
01:03definitely running a little bit behind what initial expectations were at the beginning
01:09of 2020s, when the announcements were made both for new energy as well as the expectation
01:15that people had from, you know, geo as well as retail.
01:19So to that extent, the FCA field, if you see, which is a free cash flow yield from business,
01:24that has actually remained subdued.
01:26It was in fact probably negative in FY23.
01:30It had a small positive return in FY24.
01:33And our expectation is that that number will continue to remain at the sub 2 to 3% level.
01:40So that is indeed, you know, something that gives us, makes us a little bit cautious in
01:46terms of Reliance's prospects.
01:49As far as new energy is concerned, yes, there has been a little bit of delay.
01:53I think, you know, what needs to be understood, given the complexity of what they're trying
01:58to achieve, create an integrated ecosystem across, you know, solar, hydrogen, batteries,
02:06fuel cells, and so on, it was always going to be challenging, even with Reliance's execution
02:11skills, to basically get everything done in the stated timelines.
02:16And that is something that is playing out.
02:18I really don't think that that will impact the prospects for the stock at this point
02:25of time.
02:26I think people still have a lot of faith that as and when these businesses pick up, they
02:30can actually generate superior returns and can diversify the earnings mix for Reliance.
02:36But in the near term, what is really happening is, at the same time, while Capex is again
02:41ramping up on new energy, and there is a little bit of delay, the momentum in retail seems
02:46to have slowed a bit.
02:48And in the traditional business of OTC, the kind of volatility that we are seeing in terms
02:56of margins is also causing a little bit of concern, because if this kind of weakness
03:01actually persists, then that definitely has an impact on the earnings trajectory in the
03:07near term.
03:08When I say near term, I mean in the next 12 to 18 months.
03:10So that sort of is, all of it is sort of coming together and probably impacting the stock
03:15at this point of time.
03:16Devin, good morning.
03:17It's Amina.
03:18Thanks for joining.
03:19And Devin, you've tracked Reliance for more than two decades.
03:25There are reports by Ambit where the concerns go beyond the temporary or near term adversities
03:32in that sense.
03:33They actually believe that there is no long term trigger for Reliance Industries.
03:38And I read a note or a comment by you yesterday where you said, despite these adversities,
03:43Reliance should be bought into.
03:45Do you want to justify why you're looking at this as glass half full as opposed to half
03:49empty?
03:50Yeah.
03:51Good morning, Sumedha.
03:52Well, I guess I think you have to look at the business of the company in two parts.
04:00One, the industrial products, which is driven by the oil to gas exploration businesses and
04:07the consumer segment of business, which is driven by the Jio platform and the retail
04:14particular media included.
04:17But I think more important in these two areas, I think important.
04:21Now when you look at, I think the retail and the Jio platform for say consumer facing business,
04:27you find that they are cash equitative significantly.
04:30Jio is operating on a run rate of 1,20,000 crore revenue top line and 60,000 crore EBITDA.
04:39Same as the situation with retail, wherein I think the numbers are significantly large
04:44from the point of view of revenue, as well as from the point of view of EBITDA, 7.5 to
04:50almost 8% kind of EBITDA margin on a total turnover of close to somewhere around 3,00,000
04:56crore run rate.
04:57I think is what I think this particular company is all operating about.
05:01So in my viewpoint, I think between the two businesses, the EBITDA contribution is around
05:0685 to 90,000 crores.
05:08I don't think that I think one is basically seeing any kind of de-growth or any kind of
05:12I think doubt in this business.
05:14On the contrary, both these businesses are growing at a steady rate of, Jio is growing
05:18at a steady rate of 20% and the retail is growing at a steady rate of around 15%.
05:24So this additional brand, I think from their own stable is also going to be promising from
05:28the point of view of larger EBITDA margin and at the same time, the digital platform.
05:35Now coming to oil to gas business, industrial businesses, this business is a commodity in
05:40nature, of course, but I think the way in which this company is revamping this business,
05:45they have actually changed the feedstock and as a result of which the profit margins are
05:50remaining intact.
05:51Otherwise, this commodity business has a tendency to bring down the profit margin to some 1%,
05:562% level, which is not the case here.
05:59And at the same time, they remain extremely cash-equitative out of the total EBITDA of
06:03last year.
06:04I think almost 60% of the EBITDA comes from this business.
06:07So in my viewpoint, I think nothing fundamentally has changed.
06:11Maybe the market technicals are pulling in the minds of the analyst, wherein I think
06:15more amount of traders who are basically wanting to short the market, they find the
06:20best ground in form of Reliance, HDFC Bank kind of stocks, where the weight is higher.
06:25So that's where probably I think you are basically seeing the best.
06:28That's a fair point.
06:29I mean, if you want to short the market, I mean, that's a heavy weight.
06:31But you know, apart from the technical point of view, let's come up to the fundamentals
06:37and one of the points that Prabal was making, of course, the group is now diversified away
06:42from the energy business.
06:44But going ahead, Prabal, do you see any of the factors that you mentioned actually changing
06:48or improving?
06:50What is the outlook looking like?
06:51Are these temporary blips or now more systemic issues?
06:56No, I think one of the clear shifts that Reliance has been trying to make and successfully so
07:03is to reduce the reliance on OTC business in its overall EBITDA mix.
07:10If you look at what OTC was as a percentage of overall consolidated EBITDA a few years
07:15ago, where it was easily more than 55-60%, it came down to around 40-48% in the last
07:22few years.
07:23And as the momentum from Jio and retail picks up, we see OTC getting down to somewhere around
07:2828-29% of the overall EBITDA mix.
07:33So you know, I take the point that Mr. Devyan just mentioned about even within OTC, you
07:38know, improving the fuel mix and getting into more and more speciality chemicals, you
07:43know, as reducing the kind of cyclicality that is inherent in a traditional refining
07:48business, but even the overall pie itself should actually reduce as a percentage.
07:52So that is something that if they can actually execute well, should, you know, auger well
07:57from a cyclical and a predictability standpoint.
08:01The second aspect, you know, which is basically new energy and the kind of momentum that Jio
08:06and retail will bring, Jio very clearly, you know, our telecom analyst, I think is
08:11very, very bullish in terms of the profitability growth from Jio that can actually be expected
08:18over the next few years.
08:19I think if I look at our estimates against 560 odd billion of EBITDA that they reported
08:25in FY24, the expectation is with the kind of tariff improvement that's happening, they
08:30can easily do close to about 920-930 billion odd.
08:34So these two definitely, you know, the only question is, does this kind of earnings growth
08:40continue to come at a very high cost, which is to say that does the capex momentum actually
08:45keep up with the earnings growth?
08:48And I think that has really been the story over the last three to four years where earnings
08:52growth has definitely been superior than any other peer in its market cap category, but
08:57that has continued to come at a high cost.
08:59Therefore, ROEs and ROCs have remained at some 10% level.
09:03Prabhal, in that case, I mean, the stock has largely done what the index has done.
09:09For the last one year, it's done 21% despite the fact that it's got, it's a high growth
09:14engine, like you said.
09:16Looking ahead, are you recommending that the current weakness should be used as an opportunity
09:21to add to positions of RIL or would you say better off to avoid right now?
09:25There are better opportunities in the market if one is looking to generate or create alpha
09:29for their portfolios.
09:31See, over the last one year, we've had somewhere between a hold and a reduced rating on the
09:35story, precisely for the reasons that I just mentioned, that while earnings growth continues
09:40to be segment leading, there are definitely triggers that should ensure that their EBITDA
09:46growth and their net earnings growth will continue to be in the strong, you know, mid
09:51double digit territory.
09:53And there are definitely prospects of complete transformation in terms of the business mix
09:59that is offset by the fact that, you know, the CAPEX reduction or the slowdown or moderation
10:05in CAPEX fund rate is definitely happening at a slower pace than what we would imagine.
10:10And that is something that has been true for the last three years.
10:13And as you rightly mentioned, the new energy delta, while it will take some time to come,
10:18is already captured in most street estimates.
10:21Most people, including us, are giving one and a half times capital employed to the initial
10:24plans of 70,000 to 75,000 crore that was announced.
10:28And despite that, we struggle to get beyond a fair value of somewhere around 29 to 2950
10:33share.
10:34That has been our stance and frankly, that remains unchanged at this point of time.
10:39Okay.
10:40You know, our focus on RIL this morning, Devin bhai, just one question from you and let's
10:47talk about retail.
10:49Some of the concerns in that report as well is about the growth in retail.
10:55The view is on one hand of it, the CAPEX issue comes up, but on retail, are you comforted
10:58with the pace that we're seeing?
11:00Actually, I think I would be extremely comfortable for a simple reason.
11:06They are an end-to-end solution provider.
11:10On one side, we have our own brands.
11:12On other side, I think you have got your own distribution reach, which is, I think, connected
11:17along with your payments.
11:19So I think the entire cost that they have, which is basically helping them in managing
11:25the complete supply chain logistic, is giving them a power to basically cater to the demand
11:30in respective stores, respective regions, including JioMart.
11:34At the same time, their omnichannel product model, which is basically giving them on-ground
11:39stores at the same time, digital deliveries, both synchronized at one level, which is an
11:44unbeating proposition at this point of time.
11:47So in my viewpoint, I think retail is a steady grower.
11:50Most importantly, given the global experience of retail, most of the retailers would end
11:54up earning margins of around 2% and 3%.
11:57Here this company is talking about earning margin of 7.5% to 8%.
12:01So certainly, I think there is much more power left at this point of time, as I see.
12:05And some of the large retail franchises that they have, including electronics, I would
12:09think that they are basically generating significantly large amount of growth.
12:14Given the choice once, I think, once you have Jio Finance connected with the retailing,
12:19I would think that I think the business would probably expand along with the market share.
12:23So one would remain bullish about the prospects and the possibilities.
12:26All right.
12:27Thank you so much, Prabal and Deven, for speaking with us today, RIL in Focus.