Mukesh Ambani, chairman of Reliance Industries Ltd (RIL), has had a good year. At the company’s annual general meeting in August, he unveiled plans to pare debt, announced the biggest foreign investment in RIL’s history, and outlined his vision for a consumer-facing future. In October, RIL announced it will create a new super subsidiary for its telecom and digital services business, priming it for a potential stake sale that Ambani has been contemplating for some time.

The end of the year has brought more happy tidings. On November 28, RIL became the first Indian company to hit a market capitalisation (m-cap) of ₹10 lakh crore or around $139 billion. The RIL stock also hit its all-time high of ₹1,614 on December 2, boosting the net worth of Asia’s richest billionaire to above $60 billion, making him one of the 10 richest people on earth. And to top it all, RIL has become the largest company in the Fortune India 500 list for 2019, dislodging Indian Oil Corporation (IOC) from the top spot for the first time since the list’s inception.

The annual ranking of India’s largest corporations is based on revenue. RIL’s figure for FY19 was ₹5.81 lakh crore, 8.35% more than IOC’s ₹5.36 lakh crore. In 2010, when the first list came out, IOC’s revenue was ₹2.66 lakh crore, while that of RIL, at No. 2, was ₹2.21 lakh crore, less than the leader’s by 17.03%. While IOC was at the top, its revenue was an average 15.32% higher than RIL in the eight years until 2017. By 2018, RIL was snapping at IOC’s heels: the public sector oil major retained the top slot with a difference of just 3.31%—or a little over ₹14,026 crore.

Now, RIL is numero uno in the country on three parameters: revenue, net profit, and market cap. Its net profit of ₹39,588 crore for FY19 trumps IOC’s ₹17,377 crore. RIL has consistently posted better net profit than IOC. While RIL’s net profit ranged between ₹19,294 crore and ₹39,588 crore in all these years, for IOC it ranged between ₹4,226 crore and ₹22,189 crore.

But how did RIL race to the top? Ambani’s bets on consumer-facing businesses are paying off. At this year’s AGM, he had said, “Our two consumer businesses [Jio and Reliance Retail] now collectively contribute nearly 32% to the consolidated Ebitda [earnings before interest, taxes, depreciation, and amortisation], up from 2% five years ago. The day is not far when their share would be 50%.”

In FY14, RIL’s organised retail segment, with ₹14,556 crore, accounted for 2.7% of the company’s total revenues; refining accounted for 19.2%, while petrochemicals made up 74.9%. In FY17, Jio— RIL’s digital services brand—added revenue of ₹599 crore (0.15%); it rose to ₹23,916 crore (4.41%) in FY18 and ₹46,506 crore (6.04%) in FY19. The organised retail segment clocked revenue of ₹69,196 crore (12.8%) in FY18, and ₹1,30,566 crore (17%) in FY19. Refining revenue was ₹3,93,988 crore (51.1%) in FY19, while revenue from petrochemicals was ₹1,72,065 crore (22.3%).

No wonder Ambani said at the AGM, “Sceptics used to say that Reliance cannot succeed in consumer businesses; Jio and Reliance Retail have proved them wrong.” The growth in the share of retail and telecom will also mitigate the overdependence on the volatile and environmentally sensitive hydrocarbon chain.

While RIL’s consumer-facing businesses have been powering the conglomerate’s growth, their profits, too, have gone north. In FY14, RIL’s organised retail segment raked in profit before interest and taxes (PBIT) of ₹118 crore (0.50% of total PBIT); it grew to ₹5,546 crore (8.45%) in FY19. For digital services, PBIT for FY18 was `3,174 crore (6.06%), which went up to ₹8,784 crore (13.26%) in FY19.

Even in the traditional segments, profits have gone up since FY14. For the refining segment, PBIT grew from ₹13,392 crore (52.3% of total PBIT) in FY14 to ₹19,868 crore (30%) in FY19. And for petrochemicals, PBIT grew over 3.8 times in absolute terms from ₹8,403 crore (32.8%) in FY14 to ₹32,173 crore (48.6%) in FY19.

But RIL’s diversification from a primarily business-to-business model to a business-to-consumer one has come at a cost: high capital. Since FY14, organised retail has seen a cumulative capital employment of ₹46,497 crore, which accounted for an average 3.5% of the total capital employed over the six fiscals. Capital employed in digital services increased from ₹68,392 crore (38.14% of the fiscal’s total capital employed) in FY17 to ₹2,10,321 crore (63.38%) in FY19.

However, at the AGM, Ambani said, “We have a very clear roadmap to becoming a zero net debt company within the next 18 months by 31st March 2021.” In that context, he announced a deal to offload a 20% stake in RIL’s oil-to-chemicals business to Saudi Aramco for $15 billion, which valued this vertical at $75 billion. He also announced that RIL and BP had signed a joint venture agreement in a new initiative, with BP acquiring a 49% stake in RIL’s petro-retail business which would provide ₹7,000 crore to the Indian firm. RIL has also struck a deal with Canada’s Brookfield Infrastructure Partners to monetise its telecom tower assets. Brookfield will pay $3.7 billion to pick up a stake in a trust that will hold these assets.

That’s not all. A Jefferies research report says the telecom and digital assets subsidiary may well become the second highest-valued digital platform firm in the world after Amazon, when considering the metric of enterprise value/Ebitda. The recent corporate restructuring will also unlock further value for investors.

RIL’s superlative performance has always percolated to its share price and thus its market value. If one looks at the daily market capitalisation of RIL and IOC over 5,140 trading days, from April 1, 1999, to November 22, 2019, there were 59 trading days when IOC’s m-cap was below ₹10,000 crore. Compared to IOC’s average m-cap of ₹9,612 crore on those days, RIL’s average market value was ₹25,460 crore. Going forward, analysts expect RIL to grow exponentially. “The recently announced debt reshuffling and strategic divestment plan, peaking of capex cycle, and tariff rationalisation could all lead to higher earnings and potentially higher multiples as well,” a research report by Emkay Global said, raising its target price on RIL’s stock to ₹1,680 .

In a mid-October report, Bank of America Merrill Lynch analysts Sachin Salgaonkar, Sanjay Mookim, and Sukriti Bansal assigned a ‘buy’ rating to RIL with a target price of `1,615 against the then current market price of ₹1,364. They also looked at the key drivers necessary for RIL to become the first Indian firm to reach an mcap of $200-billion in 24 months from October’s $122-billion market value. According to them, there were three transformational drivers which could add nearly $55 billion of value. First was RIL’s new commerce initiative—to empower kirana shops in the unorganised retail market by offering mobile points of sale—which could add an estimated $32 billion. Second was its entry into the SME space where its tie-up with Microsoft and attractive pricing could entice uptake. And, third, digital initiatives like advertising and lending along with SME/broadband could add $22 billion in incremental value. “We think the market is giving little credit to these initiatives given limited visibility,” they noted.

The analysts explained that RIL has seen multiple re-ratings since mid-2016 as its consumer business momentum started to improve. “In our bull-case, we expect 45% of FY22 Ebitda to come from consumer business,” they pointed out. “This should likely drive the multiple re-rating for RIL,” they said. In its bull-case, at fair value ($200 billion m-cap), the analysts estimate FY22 price-to-earnings ratio of RIL to be 19 times against the current 17 times. Besides the deal with Saudi Aramco, Ambani also spoke about RIL having received strong interest from strategic and financial investors in its consumer businesses: Jio and Reliance Retail. “We will induct leading global partners in these businesses in the next few quarters, and move towards listing of both these companies within the next five years,” he said.

Clearly, RIL’s consumer-facing businesses have been key for the top company on the Fortune India 500 list. And, it seems unlikely that IOC can reclaim its spot anytime soon.

The story was published in the December 15 - March 14 edition of the magazine.

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