The revenue visibility of the oil to chemicals (O2C) business of Reliance Industries is expected to increase given the fresh capital expenditure (capex) worth $9 billion (Rs 75,000 crore). It has a potential to generate incremental operating profit before depreciation and amortisation (EBITDA) of Rs 12,000 crore in the next five years based on the long-term average spread in the business. This along with the slated launch of 5G services should keep the stock of the country’s largest company by revenue and market cap buoyant amid high market volatility.

According to analyst estimates, the petrochemicals segment has generated operating profit of about Rs 30,000 crore in the previous fiscal year. The fresh investments will add capacities across the O2C segment including the world’s largest single train PTA plant of three million metric tonnes per annum ( MMTPA) capacity, one MMTPA new capacity each for PET and polyester, and the 1.5 MMTPA PVC plant. These capacity additions will be complete by 2026.

also plans to build one of the largest capacities of carbon fibre in the world at 20,000 MMTPA based on acrylonitrile feedstock by 2025 at the Hazira facility in Gujarat. The market for carbon fibre composite is growing rapidly given its use in electric vehicles and renewable energy.

RIL would be investing around $14-16 billion of capex each year across business segments for the next three years which would be nearly double that of the past two fiscal years. The street currently ascribes enterprise value (EV)/EBITDA of eight for the petrochemical business, which contributes one-third of the total fair value of the O2C business.

The capex on telecom would be around $25 billion out of which $11 billion is towards the 5G spectrum purchase. With super-efficient 700 MHz spectrum aided by 3.5 GHz midband, Jio is expected to launch standalone 5G services in metro areas by October. The operating profit of Jio may potentially double in the next three years compared with FY22.

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While the large capex is expected to weigh on free cash flows in the current fiscal year, it would turn value accretive as new capacities are commissioned. RIL’s stock has outperformed the Nifty 50 by 13% over the past 12 months. The trend is likely to continue given the future revenue visibility.

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