What are your thoughts on Reliance’s new green energy plans as was announced in the AGM today?
Look at what Reliance has been doing and how things have panned out in the past for them. Reliance typically gets into very large projects and executes them successfully. Once those projects start generating a lot of cash, they start looking for new growth engines for the company. That is the way the business has evolved for Reliance.
Jio is now one of the largest telecom players in India and has started to generate a good amount of cash. There are some technological plays like 5G which will happen in the next one to two years. Apart from that, it is a fairly stable business now. The O2C business is also generating a good amount of cash. The amount of EBITDA that the company is going to generate is an important aspect to understand how it will grow from the current levels.
The next wave of technology is in the green energy space. Even the battery space is in the renewable segment, which can generate an ROE of more than 18%. The capex is digestable from the perspective of balance sheet as well as cash flow generation in the next three years.
It is a very critical area that the company is getting into from an overall return on equity perspective. Overall, the belief is that ventures that the company is undertaking are ROE accretive and will result in good growth prospects. There is also a further re-rating potential for Reliance, considering that there are multiple triggers like ESG and growth trajectory.
ESG funds will also start coming, but these projects are typically long gestation period projects. In the interim, do you see the stock consolidating sideways?
These projects are, of course, long gestation projects. Whenever there is a new capex cycle, it takes time for the fruits of labour to come through. The benefits of this new chapter will start coming in after at least three to four years.
Meanwhile, the market was very clearly focussed on what is happening in the Aramco deal, the valuations and the O2C business. To some extent, there is some disappointment because we are still not clear if the deal is fructified or not and what are the contours of the deal. The market took it slightly negatively.
Other than that, most things were on expected lines. Of course, some bit of profit booking happened. This does not mean that the stock will behave sideways because of the capex plans. It may remain sideways in the near-term. The core business fundamentals look quite strong for now. So I believe the stock can do fairly well from here over the next three to six months.
Can the low-cost phone revive cash flows for Jio?
The innovation that the company is doing is very interesting. In India, there is a very large feature phone market where a conversion is slowly taking place. It remains to be seen as to what kind of ARPUs it will bring. It is difficult to envisage the profitability perspective of this innovation, but from a long-term customer lifecycle point of view it is a very critical move that the company is taking.