RIL looks to double new energy capex from Rs 75K crore even as free cash flows remain negative

• Reliance is ready to double its investment to further scale up the manufacturing ecosystem in Jamnagar.
• The company’s aggregate free cash flows earned during FY20- 23 remains negative at Rs 76,000 crore.
• FY24 is set to be another year of large capital expenditure at RIL. Overall capex intensity should fall sharply from FY25 even with a pickup in new energy capex.
  

Reliance Industries continues to be in investment mode. After its mega capital expenditure on telecom, the conglomerate is now committing billions of dollars to its other transformative businesses like the new energy business. Reliance has highlighted in its annual report that it is willing to double its investment in the new energy business from its earlier stated Rs 75,000 crore to further scale up the manufacturing ecosystem.

The company has said: “This captive demand reinforces the strategic direction supporting Reliance’s investment of Rs 75,000 crore to create a fully integrated New Energy manufacturing ecosystem in Jamnagar. Upon validating the feasibility of this initiative at scale, Reliance is ready to double its investment to further scale up the manufacturing ecosystem.”

Investors who are concerned about the company’s negative free cash flows will have to wait some more time for the tide to turn as the company has no plans to go slow on investments, even if the revenue run rate of some of these businesses have not kept pace with the pace of capital expenditure. This is visible in the company’s negative free cash flows. This has also put pressure on the company’s share price. Other than the momentum in the stock price ahead of the demerger of Jio Financial Services, the stock has not done much.

The market is concerned about the company’s negative free cash flows. Over FY20-23, RIL’s free cash flows earned during this period have remained muted. According to ICICI Securities, the aggregate FCF earned during FY20- 23 is negative Rs 76,000 crore, with small positive FCF earned in FY20 and FY22 offset by a sharply negative FCF of Rs 1 trillion seen cumulatively in FY21 and FY23.

Despite this, the company is not going slow on capital expenditure. The company’s capital expenditure in its retail business was significant for the consecutive second year in FY23. According to the annual report, RIL’s FY23 capex stood at Rs 141,800 crore, of which retail was at Rs 51,400 crore while Jio was at Rs 58,400 crore. Despite plans for a massive transformation of its O2C complex, capex was at Rs19,100 crore.

While JP Morgan believes that the benefits of its capex in retail businesses would start showing from FY25, ICICI Securities says: “We also note that revenue run rate for some of these segments has not kept pace, with retail net revenue growing 3.7x (capex run rate up 10x) from FY18-23.”

The capex intensity at RIL has not abated since it started committing billions of dollar to build its telecom infrastructure to make broadband access more accessible and affordable to Indians. The capex intensity has been high and is expected to remain high in the coming year too. RIL’s FY22 capex was Rs 99,400 crore, of which Jio was Rs 36,400 crore, retail was at Rs 29800 crore, and O2C Rs 7900 crore.

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According to JP Morgan’s estimates, FY24 is likely to be another year of large capex at RIL, mainly in Jio (5G), and overall capex intensity should fall sharply from FY25 even with a pickup in New Energy capex. The global investment bank says that over the last four years, RIL’s stated capex has been at Rs 401,400 crore (Rs 4.01 trillion) of which Jio was Rs 170,300 crore, retail was Rs 100,800 crore (Rs 1.08 trillion), and O2C was Rs 53,000 crore.

RIL intends to be among the world’s largest players in the new energy business. This ambition will need to be back with serious financial commitment as RIL has expressly stated its intention of becoming net carbon zero by 2035. Mukesh Ambani in his annual general meeting speech has already announced intention to invest Rs 75,000 crore across the value chain. The intention now is to scale this up further.

RIL has said in its annual report, “The company proposes to set up Integrated Renewable Energy (RE) Power Projects required for grid scale transmission and distribution, utility, industrial, transport, mobility, commercial, residential and consumptive purpose as well as Distributed RE including Residential and Fleet Hubs’.”

In FY24, the company plans to start at its solar PV plant in Jamnagar with a capacity of 10 GW by 2024. The company is also looking to start production of battery packs and scale up to a fully integrated 5 GWh annual cell to pack manufacturing facility. It intends to establish 20 GW solar capacity for captive needs of RTC power and intermittent energy for Green Hydrogen, commence transition from grey to green hydrogen in 2025.

The rise in retail segment is particularly striking, with capex of Rs 514 bn in FY23, ~10x the capex in this segment seen in FY18! JIO/digital services capex of INR 585bn was also the second highest seen in the last 6 years. It is noteworthy that, revenue run rate for some of these segments has not kept pace, with retail net revenue growing 3.7x (capex run rate up 10x) from FY18-23.

The conglomerate has given a roadmap of sorts in its annual report on its varied businesses, which include oil to chemicals, retail, telecom, media and new energy.

AR highlights the massive capex seen in Retail for 2nd year in a row. As per the AR, RIL’s FY23 capex stood at Rs 1,418 bn, of which Retail stood at Rs 514 bn, Jio at Rs 584 bn, O2C at Rs 191 bn. FY22 capex had been at Rs 994 bn of which Jio was Rs 364 bn, Retail Rs 298 bn, and O2C Rs 79 bn.

Reliance expects FY24 to be another year of large capex , mainly in Jio (5G). The overall capex intensity should fall sharply from FY25 even with a pickup in New Energy capex. Over the last four years, RIL’s stated capex has been at Rs 4,014 bn of which Jio was Rs 1703 bn, Retail was Rs 1008 bn, and O2C was Rs 530 bn.