Climate change is one of the biggest threats that the world faces, and that is also where the biggest business opportunities lie.
Reliance Industries Ltd chairman and managing director Mukesh Ambani reaffirmed his commitment to new energy during the oil-to-telecom conglomerate's 45th Annual General Meeting (AGM) on August 29.
Ambani said “achieving carbon neutrality globally will require multi decade of investments to the tune of $5 trillion per year, which makes Reliance’s new energy vision far more transformational and far more global”.
The company plans to invest Rs 75,000 crore in new energy.
“We have made rapid progress to create an advanced manufacturing ecosystem for new energy, which will be fully integrated, backed by world-class talent, built on pillars of technological innovation through strategic partnerships, to deliver modular, at scale, affordable and most modern manufacturing business based in India, for India and the world,” Ambani said.
Market experts said that Reliance’s big plans will ensure that the company stays highly valued even as the traditional fossil fuel companies struggle to keep their companies from getting de-rated because of ESG concerns.
Baring this year, as several companies saw stock price head higher because of a surge in oil prices and refining markets, the perception of fossil fuel companies remains poor as the world moves with greater resolve toward new energy to reduce carbon footprint.
“We are aiming for continuous hyper-growth over many decades from new energy and to establish India as a world leader in new energy advanced manufacturing”, the RIL chairman said.
Creating capacities with economies of scale
The company aims to establish 10GW (giga watt) of annual cell and module capacity by 2024 and scale it up to 20GW fully integrated quartz to module annual capacity by 2026.
Its strategic acquisitions of Lithium Werks, Faradion and a stake in Ambri have provided the company with differentiated and superior battery chemistries.
The company intends to set up battery-pack facility by 2023, scale it to 5GWh annual cell to pack manufacturing by 2024 and further scale it up to 50GWh by 2027.
Grey hydrogen and solar
Reliance is one of the largest producers of grey hydrogen (gH2) in the world and intends to complete its transition to gH2 by 2025. It has set the ball rolling to establish Giga scale gH2 manufacturing in India.
The company will also establish 20 GW solar generation capacity by 2025–for round-the-clock and intermittent power for gH2.
Green hydrogen is generated from electrolysis of water, with the entire process run on renewable energy.
De-rating of oil companies
The traditional oil manufacturing companies the world over face the risk of getting de-rated in the event of a fall in crude prices, as future growth is likely to shift to new energy.
Even though these companies will continue to generate cash, as oil will continue to find usage the world over for years to come, these companies are likely to see a continued de-rating on future growth concerns.
Until last year, most global oil companies, including giants like Chevron and Exxon Mobile, were trading at low earnings multiples and high dividend yields because of poor investor perception.
But the story may be vastly different for Reliance, despite its dominance in the oil business. Its mega plans of becoming a global leader in new energy businesses, experts feel will not only help the company achieve its target of becoming carbon-neutral but also aid in avoiding a possible de-rating of the stock.
Reliance has credibly proved its capability to diversify into other businesses from its traditional oil & gas business. Reliance Jio and Reliance Retail provide ample proof of it. But the new energy business plans ensure a multi-year growth engine even as the investor perception improves rather than deteriorates.
“With the new energy mega plan, Reliance is again going to do it directly into the new energy ecosystems which are going to replace conventional oil ecosystems,” said Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital.
“The full span from solar energy production to hydrogen technology and battery grid for energy storage makes it likely that Reliance might get entrenched in the new energy ecosystem”.
Gupta is of the opinion that the company’s return ratios could dip in the medium term while the ramp up of new tech is going on but it is unlikely that the stock will face any de-rating.
“However, the market will give credit for the capital work in progress and a premium for the new clean-tech keeping in mind that whenever Reliance has entered a new arena it has become a keystone species in that new ecosystem,” Gupta said.
The future value of course, will be based on it capturing a large percentage of the expected total addressable market (TAM).
The switch to green energy and sustainability will also enhance the firm's environment, social, and governance (ESG) ratings and create a legacy in the highly lucrative green energy industry that will help it attract many foreign investors.
However, Sonam Srivastava, Founder at Wright Research, cautioned “if the mega plan is well executed, it will up the firm’s credibility. But funding for this mega plan will be the key thing to watch.”
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