What Asia’s richest man sees as the “most challenging” mission of his life has left the stock market unconvinced, nervous – or both.
As of June 2021, Mukesh Ambani has committed $10 billion to clean energy and fuel. After India made a surprisingly bold commitment in December of that year to switch to non-fossil fuel sources for half of its energy needs by the end of the decade, the tycoon upped his green bet sevenfold.
Still, shares in its flagship Reliance Industries Ltd. currently valued at 24 times earnings, significantly less than a price-to-earnings multiple of 37 in 2020. Back then, Ambani was raising billions of dollars from Facebook Inc., Alphabet Inc. and Silver Lake Partners for its digital and retail activities, making its balance sheet resilient to Covid-19.
With the pandemic over, the conglomerate is experiencing a new surge in growth across business lines. A 19% rise in profit for March beat analysts’ estimates, while a 37% rise in capital expenditure showed that Ambani is back in expansion mode. Yet green technologies – the centerpiece of the strategy – receive little attention. Either investors don’t believe India is ready for the hydrogen revolution, or they fear the group is overstretching its finances in pursuit of the rainbow.
The current stock price reflects no value at all for the new energy business, according to Goldman Sachs Group Inc., whose base estimate is that it should be worth $29 billion. Under the bank’s more optimistic assumptions — such as a 50% share of the Indian hydrogen market for the Reliance system by 2050 — that figure will rise to $48 billion.
It’s not like investors have to wait a quarter of a century to test this thesis. It will certainly have a more immediate impact on the profits from revaluation of old energy assets. Reliance’s O2C unit is one of the world’s largest consumers of dirty or gray hydrogen extracted from petroleum coke, a heavy refinery residue. The short-term plan is to gasify petroleum coke to produce less polluting blue hydrogen, with the carbon released in the process being captured and stored. Transforming the original O2C into a “sustainable, circular and clean zero-carbon” business “will generate increasing returns over decades” by extending the economic life of existing assets, says Nuvama Wealth Management Ltd. based in Mumbai.
But will it be enough? Yes, Ambani could achieve his goal of producing blue hydrogen from syngas—a combination of hydrogen and carbon monoxide—at a competitive price of $1.2 to $1.5 per kilogram. But mass-producing green hydrogen using renewable energy to split water molecules and realizing Ambani’s “1:1:1” vision of $1 per kilo in ten years looks like a tall order. Globally, green hydrogen costs between $6 and $7. This makes it uncompetitive as an industrial raw material and fuel against both the gray and blue variants. The only way this can take hold is by rising carbon prices in Europe – and then until 2035, according to CRU Group, a commodities research firm.
Reliance is aiming for 100 gigawatts of solar installations by 2030. That’s a big part of India’s overall target of 450 gigawatts, a sevenfold increase from last year. It is also investing in the production of electrolyzers, fuel cells and energy storage, including sodium-ion technology, which could be cheaper than the lithium-ion batteries used in electric vehicles.
To analyst Jal Irani and his colleagues at Nuvama, the green energy gamble is reminiscent of Reliance’s bets on polyesters in the 1980s, petrochemicals and refining in the 1990s and 2000s, and telecoms and retail in the previous decade. But there is one major difference. This time, Reliance has “identified an industry that not only has great potential, but is also relatively new globally,” they wrote recently.
This explains why investors are shy. Ambani took India’s telecom business by storm with a scorched earth price: free voice calls and the cheapest data in the world. To acquire more than 400 million customers, it had to pick the right technologies from around the world and assemble them into Jio, its 4G service, in a supportive political environment. By comparison, switching from a largely fossil fuel-driven economy of 1.4 billion people to the as-yet-unproven green hydrogen is a much more adventurous undertaking. Even if the Indian government supports the switch, it simply cannot match the subsidies the US is throwing at its clean H2 pioneers to help them cut the price to consumers in half.
If that wasn’t daunting enough, shareholders also have a changing of the guard to worry about. Ambani was just 53 years old when he started shaping his telecom business in 2010. The billionaire is now 66 and in the process of passing control of the empire to his three children. While the elder Ambani and his trusted consigliere Manoj Modi have experience in executing complex projects, the next generation has yet to convince the market that they too have what it takes. Including supplier loans and telecoms spectrum liabilities to the government, net debt is 1.4 times EBITDA, which Goldman says is low compared to an average of 3.2 during the previous capital spending cycle from 2013 to 2017. However, Macquarie Capital points to a 64% jump in interest costs in the March quarter.
It’s all a bit too much for the market to process. By contrast, Ambani’s ambition to create a lending platform for merchants and consumers — and take it public on its own — is a simpler story and a safer bet. It could put some power back into Reliance shares by unlocking value from the group’s growing data volume in telecom, media and e-commerce. Climate technology will be a completely different game. Getting investors to rally behind Ambani’s most challenging mission yet will take more work.