Reliance Refresh
The refining and petrochemicals giant is undergoing a
slow but sure metamorphosis. Soon we’ll need to think of it as a tech and
consumer play
When he spoke at the India Mobile Congress in New
Delhi on October 25, Reliance Industries Chairman Mukesh Ambani sounded more
like a tech evangelist envisioning an India in 2020 where everyone has 4G
phones in their hands and the industry was ready for the next generation of
telecom technologies. He spoke about a “new world”, a “new India” and “new
commerce”. He might as well have mentioned a new Reliance, too. For it is
highly likely that by 2020, Reliance, India’s largest private company by market
cap, may have to be classified principally as a tech and consumer play, and not
a refiner or a petrochem producer.
A week earlier on October 18, Reliance’s financial
results for the July-September quarter was announced (54.5% jump in revenues
and 17.4% jump in profits over the corresponding quarter of 2017); and if one
takes a close look at the segment revenues, it appears that a significant shift
is underway at Reliance. For the first time, newer businesses like organised
retail, digital services and media have brought in more combined revenues (₹44,615 cr) than the highly
profitable petrochem business (₹43,745 cr).
At Reliance Industries, the refining and marketing
business, which produces and sells petrol, diesel, LPG, kerosene, naphtha and
similar products by refining crude oil, brings in the largest chunk of revenue
— ₹98,760cr,
around half of the turnover. A big chunk of these products are exported.
Petrochemicals (polyesters, polymers, synthetic fibres and other products) used
to be the next big block, and even now rakes in the most in profits.
The new businesses such as organised retail, telecom
and media are consumerfacing service businesses that are very different from
the traditional RIL — primarily a business-to-business industrial conglomerate.
The group entered these new businesses in the last decade.
“This is definitely a significant development. To a
great extent all these happened under the radar. People still focus on the
refining and petrochem business of Reliance. Only recently have they started talking
about Jio. Retail even today continues to remain out of focus for the analyst
community,” says Sudip Bandyopadhyay, markets commentator and chairman of
Inditrade Capital.
Along with the quarterly results, the company had
also announced the acquisition of cable and internet companies DEN and Hathway,
as well as its investment in US-based personal transportation company SkyTran.
Ambani clearly wants to bet on mass consumer plays
and new technologies over the next decade.
Bandyopadhyay says within three years, the way
Reliance Industries is valued will change as the newer businesses, especially
organised retail, telecom and digital offerings, grow fast and notch up higher
revenues. In fact in its current configuration, RIL presents a problem for
analysts.
Not just Reliance, other diversified companies such
as ITC Ltd or Piramal Enterprises also often have this problem of being
assessed on the basis of the existing businesses.
“Reliance should be valued by a team of analysts with
experience in different sectors, led by a senior analyst who would take a view
on the stock,” says Vinod Sharma, head of capital markets strategy and the
private clients group at HDFC Securities.
Most brokerage analysts maintain a hold or buy
recommendation on the RIL stock.
Much of Reliance’s investments in the new areas have
been fuelled by debt, and the increasing debt on its books has sparked some
concern. Outstanding debt on September 30, 2018, stood at ₹2,58,701 crore. JP Morgan India
said in a report dated October 18 that while the company had recorded strong
growth, the markets would still focus on high capital expenditure (₹39,000 crore for the quarter),
high debt (₹42,500 crore
additional borrowing since March 2018) and the delay in commissioning of the
pet-coke gasifier.
ICICI Securities said in a report dated October 19
that the concerns for the company outweigh the positives right now. The retail
and telecom plays were among the positives and worries mostly were around the
older businesses, linked to their price cycles, and high debt and investments.
The debt and investments have pushed huge growth in
the new businesses. Organised retail business with revenues of ₹32,436 crore for the
July-September quarter is the largest in India. It has shown a 121.5% growth
over the corresponding quarter last year, and 25.3% over the immediately
preceding quarter. Similarly, the digital services business, that would include
the Reliance Jio telecom and digital financial and content offerings, have
grown at more than 50% over the yearago period.
Sharma of HDFC Securities says the rerating of the
company, as a tech and consumer play, though on the cards, will be a gradual
process that will happen over the next few years. He adds that a lot will
depend on how soon the company tones down its investment spree. He says
investments at a rate around half of the current amount would help the process.
suman.layak@timesgroup.com
ETM28OCT18
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