Analysts bullish on clean energy bet by Reliance

Say global refining cycle, Jiophone Next, and rebound in retail biz may be other triggers

Two acquisitions by Reliance Industries (RIL) over the weekend — of

REC Solar Holdings, a well-established global player in solar cells, panel and polysilicon manufacturing, and Sterling & Wilson Solar, a strong player for engineering, procurement, and construction (EPC) and operations and maintenance (O&M) services in the renewables sector — have seen some research and brokerage houses reinforce their bullish stance on the company’s stock, as they see multiple factors working in its favour.

On Monday, RIL surged past the ~2,700-mark in intraday deals on the BSE, though it closed the session in the red. The counter has been an outperformer at the bourses in the past three weeks, rallying nearly 12 per cent, as compared to a 1.8 per cent rise in the S&P BSE Sensex, the data shows. Among the lot, analysts at Morgan Stanley, Bernstein, Kotak Institutional Equities, and Jefferies have maintained a buy/add/outperform rating on the stock after RIL’S recent buying spree.

“At $0.5 billion per Mw of acquisition enterprise value (EV), if we were to extrapolate to RIL’S solar photovoltaic (PV) manufacturing, it implies $7-10 billion in value creation, at least 15 per cent above our base case estimates. The acquisition should reduce investor scepticism on the company’s ‘Green Path’ and drive upside risk to NAV, as well as a multiple re-rate. We see up to $60-billion value creation as RIL rolls out its green plan,” wrote Mayank Maheshwari and Akash Mehta, analysts tracking the company at Morgan Stanley.

Besides the renewable energy push (RIL plans to start silicon-to-module integrated manufacturing of 4 Gw by 2025, before expanding it to 10 Gw), the ongoing recovery in the global refining cycle, sustained momentum in subscriber additions after the imminent launch of Jiophone Next, potential hike in telecom tariffs, and anticipated strong rebound in the retail business (the launch of 7-Eleven stores) are some of the other catalysts, analysts at Kotak Institutional Equities believe, can take the stock even higher.

As regards the solar business, REC’S long operating history in Europe and the US, said analysts at Jefferies, opens up the possibility of RIL exporting to these geographies, as well. REC is already planning to increase its solar cell and module capacity via setting up 2-3 Gw cells and module capacity in Singapore, new 2 Gw cells and module unit in France, and a 1 Gw module plant in the US.

Sterling & Wilson Solar, on the other hand, has executed over 11 Gw of solar turnkey projects globally, which analysts said, can help the Mukesh Ambani-controlled RIL make inroads into the West Asian markets.

“In addition to access to a large solar cell and module manufacturing base, RIL can leverage REC’S technology in its planned Integrated Solar Photovoltaic Giga Factory in Jamnagar. Given the global operations of REC, RIL can also establish its presence in the green energy markets globally, including the US, the EU, and Australia” wrote Anubhav Aggarwal, Sayantan Maji and Krati Sankhlecha of Credit Suisse in a note.

Domestic market

Besides tapping into overseas markets, RIL, according to analysts at Kotak Institutional Equities, is well-positioned to capitalise on the sufficiently large opportunity in the domestic solar business against the backdrop of anticipated growth in renewable power generation and recent policy initiatives for the solar business, including the production-linked incentive (PLI) scheme and customs duty protection.

“Our preliminary analysis suggests RIL will be required to invest around $3 billion to set up 10 Gw of integrated capacity, which can potentially generate Ebitda of around ~46 billion in a steady-state environment,” wrote Tarun Lakhotia and Hemang Khanna of Kotak Institutional Equities in a recent report.

While the valuations at the current level, according to analysts at Citigroup, is fair and hence drives their ‘neutral’ rating on the stock, clean energy, they believe, will not only enhance RIL’S ESG profile but also has the potential to be a key long-term value driver, if backed by strong execution and a favourable domestic market.