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Mukesh Ambani, Solar Power, 7-Eleven, and Reliance's Pivot Away from Oil

Oct 12, 2021 12:33 PM 6 min read

The last few days have seen Reliance Industries announce a flurry of deals.

On Thursday, Reliance Retail struck a deal with 7-Eleven to operate its franchise in India. This happened merely days after the Future Group terminated its own planned venture with the American convenience store chain.

Then on Sunday, Reliance New Energy Solar (RNES) unveiled two high-profile acquisitions. The first was the purchase of Norway-based REC Solar Holdings for $771m from China National Bluestar. The second involved a c. 40% stake buy in SP Group's Sterling and Wilson Solar for about $380m.

These deals underscore RIL's ongoing pivot from being a fossil fuel conglomerate to a multinational with diversified interests, especially in clean energy and retail.

Let's begin with the first one…

A Green Energy Star is Born

In a late-night filing back in March, RIL announced the demerger of its oil-to-chemicals (O2C) business into a wholly-owned subsidiary.

The prevailing understanding at the time was that this move was done with the Aramco deal in mind.

But that was just one part of the story. When hiving off Reliance O2C, Mukesh Ambani may have also had the company’s “New Energy and New Materials” aspirations in mind.

In the long run, oil, while precious and profitable, and a core reason why RIL became the behemoth it is today, is also a tainted commodity. The future of energy is green and renewable - and RIL understands this. Just as the clout of its telecom and retail arms has risen in recent years - even as share of O2C’s contribution has steadily dropped - the company is increasingly investing in clean energy.

Significantly, it aims to become "net carbon zero" by 2035. This is expected to involve cultivating a portfolio of advanced and specialty materials and transitioning to a hydrogen fuel economy

To that end, in June this year, RIL incorporated RNES and unveiled a ₹75,000cr ($10bn) plan, with ₹60,000cr ($8bn) for creating clean energy manufacturing capacity and the rest to invest in value chain and technology. All in all, Morgan Stanley predicts that the conglomerate will invest $13-15bn in new energy in the next decade - more than the amount it is expected to invest in its digital, retail and chemicals arms. And it plans to build solar capacity of about 100 gigawatts (GW) by 2030. For context, India's overall target is to install 450 GW by that time.


Reading RIL’s Green Embrace

RNES’s ventures are expected to lift the P/E multiple of its parent. The investments are also expected to boost its ESG (Environmental, Social and Governance) score. A growing share of green capex to overall energy capex ratio will also incentivise the next leg of growth.

But that doesn't mean a green transition would be seamless. RIL’s deep-seated occupation with fossil fuel businesses inadvertently questions its environmental credentials. Competition in the renewables segment is formidable, with giants like Adani Group, Tata Power Solar, Suzlon and ReNew Power making a Jio-esque disruption challenging. And India’s own shift to renewables is at risk of becoming a castle in the air even as the country struggles to quit coal.

Furthermore, a net zero commitment doesn’t mean Mr. Ambani will abandon his company’s crude operations altogether. It just means the company’s carbon emissions will be offset with investments in green energy, waste recycling and carbon footprint-reducing technologies. Reliance O2C, for the time being at least, remains at the heart of the Reliance empire.

Either way, a series of multi-million dollar deals by an entity that is less than five months old is impressive indeed!

Speaking of which…


The Art of the Deal

REC Solar has many promising technologies, including 446 patents in utility and design and another 154 patents awaiting clearance. It was the first to introduce half-cut passivated emitter and rear cell (PERC) technology which produces 6-12% more energy vs. Conventional solar panels.

As for Sterling and Wilson Solar, it is a 3,000-strong solar Engineering, Procurement, and Construction (EPC) firm with presence across 24 countries, offering a range of solar solutions, from design to operations. This transaction would also help the SP Group pare its debt, even as its bruising feud with Tata Sons continues.

This isn’t the first transaction RNES inked. In August, the subsidiary participated in a $144m investment in long-duration energy storage systems maker Ambri. The two companies are also in talks to build a large-scale battery-manufacturing facility in India. Along similar lines, Reliance is looking to set-up a 5,000-acre fully-integrated complex in Jamnagar. This would be part of the ₹60,000cr ($8bn) the company plans to spend on so-called giga-factories.

Now, let’s move on to retail…


Ruling the Retail Roost

Last year, emerging fresh from a bout of investments from the likes of Silver Lake, KKR, General Atlantic, Mubadala, GIC, TPG and ADIA, Reliance Retail began eyeing upending the e-grocery sector.

To this end, it struck a deal with Kishore Biyani-promoted Future Retail. This could give RIL a commanding 40% share of the organised grocery market. (This transaction was immediately mired in legal battles vis-a-vis Amazon.)

Then there’s RIL’s $5.7bn deal with Facebook for a 10% stake in Jio Platforms. This paved the way for a collaboration between Reliance Retail, Jio Platforms and Facebook-owned WhatsApp wherein customers could order groceries on JioMart via WhatsApp. Considering that Jio and WhatsApp have 388 million and 400 million users respectively, we’re talking big business potential.

Not to forget the 621 Reliance Fresh and Reliance Smart stores and the 52 wholesale cash and carry stores under Reliance Market that serve more than 15 million kirana stores.


Reading RIL’s Retail Pivot

Reliance’s keenness to break into online grocery stems from the sector’s immense potential. From being nearly non-existent in 2013, the market grew to a healthy $1.8bn in 2019. It was aided by a 2017 policy change that permitted 100% FDI in food retail. This led to a flood of capital from foreign investors, which enabled companies to expand into tier-2 and tier-3 cities. Meaningful investments across the entire ecosystem of food processing, cold storage and overall logistics helped the sector gain additional traction.

E-grocery is a minuscule part of the entire grocery market, which is still overwhelmingly unorganised (95%+, in fact). As of 2019, online grocery had only 0.3% market share - a number that is expected to grow to merely 2.3% by 2024. But considering the country’s rapid digitisation and the widespread adoption of e-commerce, an underpenetrated market is an untapped one in the eyes of the optimistic investor!

Major existing players include BigBasket, Grofers and Amazon. The pandemic has also inspired players in other sectors, from food delivery to real estate, to try their luck in e-grocery. This list includes Swiggy, Zomato, Dunzo, Meesho, Snapdeal, Perpule and NoBroker. However, few of these players possess a warchest comparable to that of the Ambanis. Except, of course, the Tatas, who recently acquired BigBasket.


The Art of the Deal

Now, coming to last week’s 7-Eleven deal. The first such store was inaugurated on Saturday in Andheri East, Mumbai. More are slated to be opened in the near-term, beginning with the Greater Mumbai area. (Reliance Retail already operates a convenience store chain, Reliance Fresh.)

The 24x7 store format isn’t particularly omnipresent in India, being limited to a few pockets in tier-1 cities. The most visible player in this segment is the Modi Enterprises-run 24SEVEN chain.

But the market seems to be banking on increasing urbanisation and an expanding middle-class. Dunzo, Swiggy and Grofers are some of the startups setting up late-night delivery infrastructures and building their own warehouses and storage to cater to the same.

With 7-Eleven in its kitty, Reliance has further solidified its stronghold on the organised retail sector, which places it on a better footing to spread its wings in e-grocery. With oil on its way out, RIL needs its clean energy and retail bets to succeed. If the recent array of big bang acquisitions are any indication, Mr. Ambani seems to have the proverbial ace in the hole.


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