In just two years, India’s billionaire businessman Mukesh Ambani has picked up stakes in over 20 startups and about half-a-dozen small companies, making Reliance Industries watchers wonder what he is really up to.Ambani and his merger & acquisition team have been extremely busy past few months, cherry-picking nearly two dozen startups with visible potential. Last week, the company acquired conversational artificial intelligence platform Haptik.
Half of these deals have been done in the telecom and media spaces, which suggests Team Ambani has much more up its sleeve even after turning things upside down in a telecom industry that had already struck deep roots.
Some of the acquisitions, including music streaming apps, a media production house, a cable network and artificial intelligence firms, clearly suggest the conglomerate’s ambition of dominating India’s digital content domain.
Last week, Reliance Jio Digital Services inked a Rs 700 crore deal to acquire Haptik, one of the world’s largest conversational AI platforms that counts Samsung, Coca-Cola, Future Retail, KFC, Tata Group, Oyo Rooms and Mahindra Group among marquee clients.
“This strategic investment underlines our commitment to further boosting the digital ecosystem and providing Indian users conversational AI-enabled devices with multi-lingual capabilities,” Akash Ambani, Director, Reliance Jio, said in a statement announcing the acquisition.
Last March, Reliance Jio announced integration of its digital music service, JioMusic, and OTT platform Saavn that powers Amazon Alexa in India. The combined entity, valued at over $1 billion, then brought in JioSaavn to compete with the likes of Amazon Music, Apple Music and Gaana.
In June that year, RIL bought open telecom solution provider Radisys for $74 million in a deal focused majorly on enhancing Jio’s presence in 5G, Internet of Things, and open source architecture adoption.
India is yet to adopt 5G, with the spectrum allocation expected to start only sometime in late 2019. Ambani’s Reliance Jio is lining up 5G launch by mid-2020.
“It (RIL) is on the path to becoming India’s Netflix or Amazon,” says Sanjiv Bhasin, Executive VP, Markets & Corporate Affairs, IIFL Securities.
RIL has figured out today’s Indian consumer is all about technology, social media and entertainment. It also does not hide its ambitions to make it big in the retail space.
It opened 365 exclusive Jio points, adding 2.9 million sq ft (up 16 per cent) in the nine months ended December 2019 while its listed peer Reliance Retail added 260 stores (around 2.2 million sq ft).
Reliance Retail last month acquired mid-segment menswear brand John Players from ITC. This will add Rs 350 crore to Reliance Retail’s value fashion business, which it runs through Reliance Trends and Ajio.com.
Four years back, RIL unveiled Retail 2.0, a programme that aims to cannibalise e-commerce to achieve a unique convergence of online and offline retailing across formats through omni-channel presence.
Analysts on Dalal Street are taking note. Some say it won’t be long before they begin to ascribe extra value to the company based on the new-age digital smart play.
Analyst reports on RIL increasingly cite the strengthening secondary businesses, alongside solidity in the primary energy interests, as factors supporting the stock, which has grown three times in last four years. Some analysts expect this momentum to continue in the near term, as they estimate an improvement in the company’s return on capital employed (RoCE).
RIL’s consolidated return on capital employed (RoCE) grew to 11.80 in FY18 from 10.10 per cent in FY17 and 10.70 per cent FY16.
The company looks well placed to scale up its consumer businesses (Jio, Retail) to capture the upside from India’s transition towards organised retail.
Reliance Retail’s revenues have nearly doubled for five consecutive quarters and Ebitda nearly trebled for four consecutive quarters, RIL said in a statement announcing December quarter earnings.
RIL’s core retail revenues have grown at a CAGR of 56 per cent over FY16-19. “We forecast 25 per cent growth over the next two years. Its core retail revenues annualised at $11 billion, implying 10-12 per cent market share in the organised retail space,” HSBC Global Research wrote in a report.
Jio reported its fifth straight profitable quarter in October-December, with a 65 per cent year-on-year jump in bottom line, boosted by strong user additions and increased data usage.
Oil and gas, petrochemicals and refining still contribute 80 per cent of top line for the business behemoth, which delivered Rs 5,42,329 crore revenues for FY18. But the share of energy revenue has declined steadily from nearly 100 per cent in FY14.
Suddenly, the business house is looking at an entirely different revenue composition. “Reliance Industries is working around a well-knit strategy of carriage-connectivity-content-commerce. Its acquisitions are woven around this cohesive plan. While profits are rising steadily, it is transforming into a dominant, mass consumer-oriented franchise. It's only a matter of time before the market begins to give the stock a trading multiple of a new-age digital smart play, rather than an oil and gas play,” says Amar Ambani, Head of Research, Yes Securities. Ambani declared he has exposure to the stock.
The RIL stock has been one of the dominant market movers over the past few months, hitting fresh highs in recent weeks. However, some analysts caution that it is now an over-owned stock and any slowdown in earnings could be a damper for shareholders.
Analysts note that the company has of late been focussing on reducing debt to strengthen its balance sheet.
“The sale of East-West pipeline to Brookfield and monetising tower assets and mega fibre assets through a possible InvIT to global players will help raise significant resources for future investments and to repay debt. We see the RoCE inching upwards in the next three years,” says Ambani of Yes Securities.
As of December 31, 2018, it had a total outstanding debt of Rs 2,74,381 crore compared with Rs 2,18,763 crore as on March 31, 2018.
Dalal Street is counting down to the moment when Ambani would eventually demerge its bread-and-butter energy interests from consumer businesses.
Such a demerger is going to unlock value for shareholders, say analysts. Sameer Kalra, Founder, Target Investing, is bullish on RIL’s outlook as the completion of transfer of telecom and fibre assets will now help increase cash flow.
“We are most likely to see a demerger of the telecom business in FY20 and then retail. As a first step in that direction, they have already transferred the asset to a trust. A demerger will give separate valuations to the high-growth business, which is the future, and the new stock can trade at a higher PE compared with the traditional business,” said Kalra.
Jiten Parmar, co-founder, at Aurum Capital, said Jio is on the verge of becoming India’s largest mobile service provider and must be commended for doing it in such a short time. “Reliance Retail is by far the largest and fastest-growing retailer in India. RIL should be valued as an SOTP of these three businesses. We see tremendous value creation happening in the digital and retail businesses,” says he.
Pramar said he has exposure to the stock.
In December quarter, RIL surprised market with a record net profit of Rs 10,250 crore. As the March quarter earnings season unfolds, expectations are building up for RIL numbers again.
“RIL will continue to outperform considering the Jio volumes and prices amid huge data consumptions in the runup to the elections. The recent rise in crude oil prices means the margin will be in better shape,” says Bhasin of IIFL Securities.
Bhasin expects the stock to hit Rs 1,550 in the medium term, and Rs 1,750 in next two years. The stock traded at Rs 1,328 on Tuesday.
HSBC Global Research recently lowered RIL’s earnings estimates for FY19 and FY20 by 2 per cent and 8 per cent, respectively, factoring in current margin trends across business segments, but left them largely unchanged for FY21.
“We lower our GRM assumptions to factor in softer margins in January-June 2019, which will lower refining Ebitda in FY19-20. However, this will be offset partly by an improved outlook for the organised retail business, leading to higher Ebitda estimates over FY19-21. Overall, we lower FY19-21 Ebitda by 5-9 per cent and EPS estimates by 0 per cent to -8 per cent,” HSBC said.
The brokerage, though, has a ‘buy’ rating on the stock as the brokerage "remains confident that growth projects coupled with a strong margin environment can drive an 18 per cent earnings CAGR over FY18-21e. Further, its energy business continues to generate strong free cash flow whereas the growth outlook for consumer businesses, retail and telecom (Jio), remains strong.”
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