Reliance’s Renewable Energy Plans Rekindle Cash Flow Concerns

You never get bored with the actions of Reliance Industries Ltd (RIL). They fell in two consecutive trading sessions, after the announcement at its 44th annual general meeting (AGM), of a drop of 4.5%.

While high expectations ahead of the AGM were a factor, analysts and investors are also concerned about higher-than-expected capital spending plans (capex). At the AGM, RIL said it will invest 75,000 crore for its new renewable energy business over the next three years. Naturally, this would increase investment and some fear this could dampen the outlook for Free Cash Flow (FCF).

“FCF’s outlook remains subdued relative to expectations of a lasting and significant turnaround,” Macquarie analysts said in a June 25 report. The brokerage added that RIL has not seen a sustainable FCF generation in the past 15 years and the measure is at an all-time low. $ 11 billion in fiscal year 21. “We increased our capital spending for fiscal year 22-25 (on average $ 12 billion per year) by about 20% to reflect investments in the new energy materials activity announced, “Macquarie analysts said, adding,” On our forecast, RIL remains FCF negative for the foreseeable future.

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High maintenance

Of course, Macquarie is on one end of the spectrum given that his investment outlook is around 50% higher than consensus estimates. It should be noted, however, that many brokers have yet to revise their capital expenditure estimates upward after the AGM. To be sure, the scale of RIL’s renewable energy plans is far smaller than the mega-investments of its telecommunications company. However, the risk of capital spending overruns remains.

At the AGM, Chairman Mukesh Ambani said the conglomerate intends to produce 100 GW of solar power by 2030. Overall, the new energy plans should help the company achieve its vision. to become net zero carbon by 2035. On the brighter side, RIL focus’s new energy should improve its environmental, social and governance scores. Of course, it is not only RIL’s energy plans that can weigh on investment prospects, but also its digital ambitions. Ambani said that RIL believes it is the first to launch full-fledged 5G services. “Even though the timelines for 5G auctions are uncertain, (Reliance) Jio’s focus on 5G suggests he could buy 5G spectrum sooner rather than later. This could result in an earlier than expected 5G investment cycle, which does not bode well for the industry’s FCF / ROCE profile, but could further consolidate the market, ”analysts at Jefferies India Pvt said. Ltd in a report released on June 24. ROCE is return on capital employed.

BofA Securities sums it up, “Capital investments, coupled with investment in 5G, are likely to push RIL from its recently reached net debt position to a light debt position (

High investments, by themselves, are not viewed in a very negative light. After all, Jio’s high initial investments generated huge returns for shareholders. However, since the value of a business is ultimately the value of its cash flow, investors hoped that cash registers would start ringing consistently with Jio’s decrease in capital spending. They may now have to be prepared to wait longer. High investments also depress return ratios – RIL’s return on capital last year was 7.5%, according to Jefferies, and will be between 7% and 8% over the next two years, estimates the broker. Granted, while RIL stocks have been under pressure lately, investors can hardly complain, given that stocks have significantly outperformed post-covid, thanks to the firm’s significant fundraising and deleveraging efforts. .

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About Myra R.

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