Clean energy a $2 trillion opportunity for RIL: Bernstein report

RIL could potentially achieve around $10 billion of revenue from new energy business in 2030

Reliance Industries (RIL) will be one of the key beneficiaries of India's clean energy opportunity over the next few years, suggest analysts at Bernstein in a recent report. It maintains an 'outperform' rating on the stock with a target price of Rs 3,040, an upside of nearly 20 per cent from the current levels.

"India targets solar capacity of 280GW and 5 million tonnes of green hydrogen production by 2030. We expect electric vehicle (EV) penetration will reach 5 per cent for passenger vehicles (PV) and commercial vehicles (CV), and 21 per cent for two-wheelers (2W). Clean energy could have a total addressable market (TAM) of $30 billion in 2030 ($10 billion currently). By 2050, we estimate the TAM could reach $200 billion and cumulative spending of $2 trillion," wrote Neil Beveridge, managing director at Bernstein in a recent coauthored note.

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RIL, Beveridge believes, could potentially achieve around $10 billion of revenue from new energy business in 2030, which represents 40 per cent of the TAM.

"For solar, we expect RIL can reach 100GW of installation by 2030 which is 36 per cent of total 2030 India solar capacity of 280GW. For batteries, RIL could also achieve a similar market share of 36 per cent with battery capacity of 50GWh versus expected battery capacity of 139GWh in 2030. For hydrogen, we expect Reliance can capture about 19 per cent of the market with 16GW of cumulative electrolyzer capacity by 2030 versus our expected TAM of 81GW," the Bernstein report said.

That said, the value of new business for RIL, the analysts believe, is highly dependent on the company's ability to execute and grow the New Energy business

"Based on a 2050 TAM of $206 billion, we can see a range of valuation based on RIL's market share and valuation multiples (P/S) below. Assuming a 1.0-1.5x multiple which seems to be an appropriate valuation level for profitable ex-growth companies in the energy sector and a large market share of the India market, then we can see Reliance New Energy valued in the range of Rs 100-200 per share after discounting the valuation back to today," Beveridge wrote.

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Margin expansion

RIL's oil-to-chemical (O2C) business, the report said, has performed exceptionally well in the past year with margins recovering to pre-Covid level driven by low inventory and supply constraints. With Russian crude oil struggling to find buyers and Europe short diesel supply, RIL, analysts believe, has an opportunity to capture significant upside in refining crack spreads under current market dynamics.

"For FY24, we expect RIL to deliver O2C EBITDA of Rs 630 billion (1 per cent rise YoY), which is in line with consensus estimates of Rs 631 billion. Our longer-term outlook on O2C EBITDA is largely in line with historical levels, although this excludes any major capacity expansion other than what has been announced," the report said.

Bernstein expects the O2C business to be the largest contributor of EBITDA in FY24 at 38 per cent. Beyond FY24, it expects the digital and retail businesses to grow at a faster clip, which will limit the EBITDA contribution from O2C to around 20-30 per cent of total EBITDA.

"This still remains significant. Digital will represent 35-40 per cent of total EBITDA over the next 5 years. Retail (offline + online) will grow from 11 per cent of total EBITDA in FY23 to 17 per cent by FY27. Assuming RIL can execute its new energy business strategy as planned, then we expect the business can contribute almost 6 per cent of the company's total EBITDA by FY27," the report said.

Meanwhile, RIL plans to fund future capex from operating cash flows (OCF) and maintain net debt to EBITDA of less than 1x (0.6x in FY23). Free cash flows (FCF), the Bernstein report said, will turn positive in fiscal 2023-24 (FY24) and reach Rs 1 trillion by FY27.