Reliance Industries Ltd's strong cash flow generation in the "best in class" old energy business can fund the capex of the new energy business and in turn drive one of the fastest and most profitable net-zero transitions by 2035 amongst large energy companies, Goldman Sachs has said.
Billionaire Mukesh Ambani in 2020 set a 2035 target for Reliance, which operates the world's largest single-location oil refining complex and also has an array of petrochemical units, to turn net carbon zero by 2035.
The company has already spent $1.5 billion in acquisitions to lay grounds for its new energy forays that include solar, battery and hydrogen. The carbon savings on these are to offset emissions from oil and chemical businesses.
In an April 10 note, Goldman Sachs said Reliance is adopting a manufacturing approach to net zero emissions with a hyper integrated model spanning solar, battery and hydrogen and a focus on a net-zero supply chain.
"RIL's energy business is best in class, in our view, with the highest complexity globally and the lowest cost structure driving stable and higher margin capture versus peers," it said.
This helps the firm to earn higher refining margins over the industry benchmark.
"Alongside refining, we also expect (oil and gas) exploration and production (E&P) to drive the next leg of growth for the energy segment, as we estimate E&P EBITDA of $2-2.6 billion in 2023-24 versus $35 million in 2020-21 driven by rising domestic gas production and more than doubling of domestic gas prices," it said.
While for petchem, margins are expected to trough in the current quarter and a recovery ahead led by economic run cuts from higher-cost North Asia crackers and likely underperformance of ethane prices to oil prices.
"We believe RIL's investment in new energy can be fully funded by internal cash generation from their old energy business (oil-to-chemical) and in turn, could drive one of the fastest net-zero target (2035) amongst large energy value chain companies," Goldman said.
It forecast EBITDA and free-cash-flow generation of $35 billion and $14 billion respectively over 2021-22 to 2023-24 from RIL's old energy business as compared to $10 billion capex announced for New Energy.
On its new energy strategy, the brokerage said RIL is planning to manufacture polysilicon, wafers, cells, modules, EV and grid storage batteries, elelctrolyzer, and fuel cells.
"We see RIL as India's largest greenabler with the company's total projected outlay of $10 billion over the next three years. RIL has already spent $1.5 billion to acquire technologies across the solar battery and hydrogen ecosystems," it said.
It saw significant expansion in the market for solar, battery and hydrogen manufacturing globally as well as in India and expected RIL to generate EBITDA of $3.6-12.2 billion by 2029-30 and 2039-40.
"We value RIL's new energy segment at $30/48 billion in our base and bull case respectively," it said. "The hyper integrated model can position RIL as one of the lowest cost green hydrogen producers with RIL targeting costs at around $1 per kg by end of this decade." For consumer-facing businesses of Reliance, Goldman Sachs forecast a compounded annual growth rate of 29 per cent in EBITDA for telecom between 2021-22 and 2024-25 and a 43 per cent rise in retail EBITDA.