What stood out to you at the Reliance AGM? Quite a few historic announcements were made but then why the stock got a lukewarm response?
A simple answer to the question (on stock performance) is that Thursday was the expiry day. Traders may enter the market on Friday.
I think the company has demonstrated an extraordinary amount of vision by putting four giga factories on the roadmap and committing Rs 60,000 crore worth of investment in 3-4 years, along with investments from the material supply factories which would be an additional Rs 15,000 crore. So a total of Rs 75,000 crore worth of investment roadmap has been set for the next three to four years.
This is extremely fundamental because the company would be contributing around Rs 135,000 crore worth of EBITDA this year. Next year, the figure could be somewhere between Rs 125,000 to Rs 150,000 crore. If you see the amount of money that the company is generating from its existing businesses, the investment of Rs 75,000 crore in three to four years is extremely possible to manage.
They have covered the entire universe of the green energy system, be it solar, storage, or fuel cell technology and electrolysers. You should keep an eye on the valuations. These kind of businesses could easily fetch you a valuation of around 12-15 times EV/EBITDA on a conservative basis. But at this point of time, we will not talk about it. Let them execute.
The Saudi Aramco part is getting cleared. The Saudi Aramco relationship is taking the company to the next level into the world market. From the classic refining business they are going into a speciality chemicals and new materials business. They will be in a position to attract ESG funds. That could possibly result into a higher valuation. Apart from the existing businesses, the new businesses are value accretive and positive as far as the valuation appreciation is concerned.
What are your thoughts on Aramco chief joining the board? Both the companies are also looking incrementally in the direction of the new energy world?
Different possibilities can emerge with Aramco. There might be some investment in O2C business or the two of them could put together a joint venture because they are transitioning the business from fossil fuel to new materials business. This is going to be a new chapter of transiting from fossil fuel segment to new materials segment. It would be a journey of 10 to 15 years.
Would you be reworking your price targets on Reliance now? Or do you think it is early for that?
My understanding is that Reliance is a 25% compounder for the next 10 years. If you want to look at Reliance from a six-month period or for a year, I am not an expert on that.
Their consumer-facing business has already started contributing about 50% of EBITDA to the existing business. So this is important and that business attracts a lot of money. Now on the other side, you are putting money in the green business which ESG funds like. So they would probably start putting money into the company. Because of that, you should get relatively higher valuations.
They spoke about the new material building blocks. They are likely to monetise it much faster because they have done pilots successfully and things are now on track. So all these three things put together, whether you look at EV/EBITDA or you look at any other ratio, you are likely to see the valuation getting rerated. It may happen now or over a period of time. I do not know, but 25% compounding is something which I look at for the next 10 years from Reliance.