RIL AGM — a shift in favour of promising consumer-facing businesses opens the room for re-rating

Reliance Industries is undergoing a transformation and that offers an opportunity for investors. The good news from the company’s AGM is not just the roadmap to net zero debt by end of FY21, but a gradual change from a cyclical commodity play to one which will be increasingly driven by consumer facing businesses. And that means much more stable, predictable cash flow and hence better rewards for the investors.

Strategic partnership to correct capital allocation in legacy businesses

While staying with the basic businesses which it has painstakingly build, the big investments for the future are being made elsewhere. BP is acquiring 49% stake in the petro-retail business for Rs 7000 crore. Reliance and Saudi Aramco have agreed to form a long-term Partnership whereby the later will invest in Reliance for a 20% stake in Oil to Chemicals division at an enterprise value of US$ 75 billion. This deal covers all of RIL’s refining and petrochemicals assets, including 51% of the petroleum retail joint venture. In the exploration business too, the driver will be the joint venture with BP. The focus will gradually be on higher value added products, like speciality chemicals and away from commoditised products.


The incremental focus will be the consumer facing businesses and by Chairman Mukesh Ambani’s own admission, it will not be long before they make up for half of the consolidated EBITDA.

Why this proposition is so unique?

However, what is more interesting about the new Reliance’s strategy is the enviable reach into every aspect of Indian life (through Jio, entertainment and retail) and the access to the wealth of data on Indian population/business that will be totally irreplicable by any competitor. This will provide tremendous cross-selling opportunity or entering any-consumer facing business much easier at a later date.

Let us turn to Jio first. With 340 million strong customer base and addition of more than 10 million new customers every month, the half a billion customer milestone is well within sight.

However, what is music to the ears of the shareholders is the fact that the big capex phase (invested close to Rs 3.5 lakh crore) in telecom is coming to an end and it is time to reap benefits by effectively sweating the assets. Reliance plans to do that with its multipronged strategy.

The company has already started reducing debt in the balance sheet with divestment of about Rs 1.17 lakh crore of hard infrastructure into separate infrastructure investment trusts or InvITs to better monetize and unlock value from these assets. The company is eyeing new revenue streams to better leverage the assets created through pan-India offerings like Internet of Things or IoT, home broadband, enterprise broadband and broadband for small and medium businesses. With strong revenue traction and minimal capex, cash flow should improve remarkably in the future.

Jio aims to connect at least 1 billion devises on its IoT platform, translating to Rs  20,000 crore per annum revenue opportunity. Jio Fiber plans to cover 20 million residences and 15 million business in 1,600 towns. High speed broadband connectivity, digital set top box, landline phone connection, free calls within India, smart home solutions, a television set, automatic subscription to leading OTT platform are all the carrots offered that should enable faster penetration of Jio Fiber.

For businesses, Jio will give easier and cheaper access to blockchain technology all over India, In partnership with Microsoft, Jio would set up a network of large world-class datacenters across India wherein Microsoft will bring its Azure cloud platform. So Jio aims to capture lion’s share of technology spend by Indian businesses, going forward.

The connectivity and cloud infrastructure would be available for free for startups and for a very economical rate for small and medium enterprises. But for Jio the long-term gains in terms of partnership with these businesses and knowledge and understanding of the customer ecosystem will be invaluable.

The understanding and knowledge of every customer and every small and aspiring business in India will give the group an unparalleled database that its retail business can ride on successfully.

Jio a driver for retail as well

The retail business has grown phenomenally, registering a 7-fold increase in revenue and a 14-fold increase in profit in the last six years. It is the best proxy for the consumption story of India.

The business has achieved a significant milestone with our turnover crossing Rs 1,30,000 crore in the last year with an EBIDTA margin of 4.7 percent, which is better than most retailers.

What’s in for the shareholders?

With a gradual de-focus on cyclical commodity businesses and thrust on consumer-facing ones, the shareholders should be looking at substantial value unlocking, going forward.


Source: Company, Moneycontrol Research

Our rough estimates suggest that these two businesses contributes close to 85 percent of the current market capitalisation, leaving substantial room for upside given that the company is staring at the end of this capex cycle, substantial de-levering through strategic sales and unlocking value in promising businesses.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.