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Hydrogen can achieve 14-15% ROCE for RIL, says Morgan Stanley report

By the end of this decade, hydrogen and related ecosystems will create a $10-billion value for RIL and account for nearly 10% of RIL’s earnings, as the company invests nearly $4-5 billion in the new energy businesses, it said.

As the green hydrogen ecosystem is rolled out, it will also raise demand for RIL’s solar panels.
As the green hydrogen ecosystem is rolled out, it will also raise demand for RIL’s solar panels.

An increased awareness of energy security is creating new and bigger markets for solar panels and electrolysers, which not only inflects Reliance Industries’ (RIL) new energy ROCE (return on capital employed), but will also help fund this growth, global brokerage Morgan Stanley in a report. By the end of this decade, hydrogen and related ecosystems will create a $10-billion value for RIL and account for nearly 10% of RIL’s earnings, as the company invests nearly $4-5 billion in the new energy businesses, it said.

“We estimate tightness in the gas and fuel refining markets will fund nearly half of RIL’s new energy capex over the next three years, as refining margins and gas prices stay above mid-cycle levels. Hydrogen is in its third cycle of potential adoption (post the 1970s and 2000), but unlike the past, it is now more competitive. The economics of hydrogen are less punitive now in view of the tightness in global gas markets and high carbon costs,” the report said.

As the green hydrogen ecosystem is rolled out, it will also raise demand for RIL’s solar panels. India’s 2030 hydrogen production target would absorb the entire 100-GW cumulative panel capacity that RIL plans to achieve, the report said, adding that RIL’s pet coke gasifiers can also be monetised at higher multiples as hydrogen demand outstrips supply, and green/blue hydrogen export potential also supports multiples, especially as the company re-purposes its energy/chemicals operations. RIL’s hydrogen push will lower operating costs medium term, while also advancing its net carbon-zero target, Morgan Stanley said.

“We expect up to a 10% boost to RIL’s NAV in anticipation of quicker hydrogen monetisation — quite similar to its digital and retail NAVs over the past decade, which were discounted three-four years ahead of their actual earnings contribution. We estimate hydrogen can achieve a 14-15% ROCE for RIL on a through-cycle basis — on par with its highly profitable oil-to-chemicals operation,” the note from the brokerage said.

Morgan Stanley has upgraded RIL’s target price by 20% to Rs 3,253 a share, reiterating its ‘overweight’ rating on the stock. The scrip hit a 52-week high on Thursday at Rs 2,765.50, up 1.73%. “We believe the share price implies near-zero value for the new energy business and no upside from NAV accretion in the traditional energy business, especially as it funds the next investment cycle,” the report said.

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