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Turning New Energy Vision to action  

* The Ministry of New and Renewable Energy (MNRE) recently announced its plans to (1) set up two hydrogen hubs in India by FY26, and (2) provide incentives up to INR44.4b for electrolyzer manufacturing through a second tranche. We believe both these announcements are key milestones toward the government’s vision to develop a robust green hydrogen ecosystem in India. These initiatives also align with RIL’s plans to establish a Giga-scale electrolyzer manufacturing facility.  

* Additionally, O2C earnings in 4QFY24 should remain robust, given sharp recovery in SG GRM to USD 7.4/bbl (3QFY24: USD 5.5/bbl) even as key petchem spreads over naphtha are stable on a QoQ basis.  

* In the telecom business, we are building in 5%/4% CAGR for subs/ARPU over FY24-26 period, while in retail, we expect a 29% CAGR EBITDA (FY2426), led by store additions, higher store productivity, and foray into digital and new commerce. We reiterate our BUY rating on the stock with a TP of INR3,210. 

Policy support to build Green Hydrogen eco-system continues

* MNRE recently announced guidelines to set up two hydrogen hubs in India by FY26, entailing a capex of INR2b and with the aim to develop demand and supply centers in the same cluster, achieve economies of scale, and increase competitiveness v/s fossil fuels. Central, state, and local governments will come together to develop these hydrogen hubs.

* MNRE also announced guidelines to provide additional incentives for Electrolyzer Manufacturing (Tranche-II). The program is scheduled to run from FY26 to FY30, entailing an outlay of INR 44.4b. Tranche-II aims to promote domestic electrolyzer manufacturing capacity development, thus aiming for lower overall cost of hydrogen production.

* SECI would manage the tender, offering financial support per kW starting at INR4,440/kW and decreasing to INR1,480/kW over five years, while prioritizing local value addition and electrolyzer lifespan.

Transitioning New Energy Vision to tangible plans

* Reliance has a vision to invest USD10b in new energy and materials business and the green hydrogen business is a core part of this vision.

* RIL aims to set up a Giga-scale electrolyzer manufacturing facility in Gujarat and targets to begin its transition from Grey to green hydrogen in FY26. In the next decade, RIL has outlined a vision to be able to produce green hydrogen at less than USD1/kg.

* As such, we see recent policy announcements as key steps in the government’s efforts to build a robust hydrogen eco-system in India.

* Further, in FY25, RIL is expected to commence operations at its solar PV giga factory and battery pack production, expecting energy savings from FY26. In the medium term, energy costs for the standalone entity may drop by 30-40%, with plans to expand the PV factory to 20GW (from 10GW) and the energy storage factory to 50GWh (from 5GWh) by CY27.

* India’s current rate of renewable energy (RE) capacity installation is only ~12- 15GW per annum, while the “ask-rate” to achieve the government’s vision of ~500GW in RE capacity by FY30 is ~50-60GW per annum. As such, we continue to see a strong multi-year pathway for RIL’s new energy and materials business.

Refining margin remains strong; Petchem bottoming out

* In 4QFY24’td, SG GRM averaged USD7.4/bbl, up from 3QFY24 average of USD5.5/bbl. Gasoline margin has improved 85% QoQ in 4QFY24’td, while diesel margin was at USD16.7/bbl (flat QoQ). PE, PP, and PX margins over Naphtha in 4QFY24’td is +6%/+3%/-1% QoQ at USD392/330/475 per mt

* We build in a 9% CAGR in standalone EBITDA over FY24-26E, driven by higher volumes (no major shutdowns like in FY24), strong refining margin, and a moderate expansion in petrochemical spreads, especially in FY26.

* O2C earnings in 4QFY24 should see the full impact of higher volumes as well as improving spreads. On a full year basis, this would result in robust FCF generation at the standalone level, which in our estimate rises from INR49b in FY24 to INR359b in FY26.

Valuation and view

* We value Reliance Retail’s core business at ~35x EV/EBITDA on FY26E and connectivity at ~5x to arrive at our valuation of INR1,759. Reliance Retail’s value in RIL share is INR1,547/share (for its 87.9% stake). Our premium valuation multiples capture the opportunity for the rapid expansion of RELIANCE’s retail business and the aggressive rollout of digital platforms.

* For RJio, we are building in a CAGR of 11%/15% in revenue/EBITDA over FY24-26. The business is valued at an EV/EBITDA multiple of 12x on FY26E EBITDA. Potential tariff hikes, market share gains from VIL, and opportunities in digital offer an option value of INR130, thereby arriving at a valuation of INR889/share (adjusted for its 66% stake).

* Using SoTP, we value the standalone business at 7.5x Dec’25E EV/EBITDA to arrive at a valuation of INR955/share. We ascribe an equity valuation of INR889/share to RJio and INR1,547/share to Reliance Retail (factoring in the stake sale) as well as INR37/share to the new energy business. We reiterate our BUY rating with a TP of INR3,210.

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