Where does Reliance Industries go from here?

If you’re wondering that RIL is entering into a tie-up with Tesla and soon launching us to space looking at the featured image of today’s post,

My guess is as good as yours.

Almost three months back I got the opportunity to articulate my thoughts on Reliance in an hour-long fireside chat here.

The question that I get asked now a lot from most of the readers is this

What next for Reliance?

To understand what lies ahead, it is important to understand what Reliance has done in the past decade. I articulate this in a long post here.

I still believe that the road ahead for Reliance will continue to hinge on four important factors –

1. Free Cash Flows
2. Retail Value Unlocking
3. Effective Commercialization of New Businesses
4. Succession Planning

Let’s start with the first driver.

Free Cash Flows

Well, it is no surprise that RIL does not generate Free Cash Flows (FCF). What is FCF? If a firm is doing capex which is well within it’s Operating Cash Flow, it will always end up with Cash Surplus i.e. FCF.

The other way to look at this is to understand that FCF will only be possible if the ROCE of the business is higher than the Cost of Capital. i.e. dhandha’s return > punji ka kharcha (Business should return more than the opportunity cost of your funds.) This has been articulated really well in this post here.

While the reason for the negative FCF was because of the capex cycle that had been going on w.r.t. Jio and laying optical fibre cable network throughout the country, the management has indicated that the cycle has indeed concluded. This has obviously been followed by a wonderful fundraise from a clutch of who’s who in the global community of investors.

Will RIL be able to generate future FCF?

Well, the CFO might get impacted on account of the O2C business, but the Retail and Platforms business might be able to do some offset. This again is more a ‘demand-side’ play but on the supply-side, we may not see Capex happening. That gives some comfort around the expectation of future FCF generation.

https://youtu.be/0G7utQiURkA

Retail Value Unlocking

Before the Silver Lakes deal happened, the ‘grey market premium’ was valuing RIL at a much, much higher multiple.

What is Grey Market Premium?

A fancy word used by brokers to screw you.

— Saket Mehrotra | Long India 🇮🇳 (@mehrotra_saket) September 2, 2020

The deal took place at a EV/Revenue multiple of 2.8x (half the multiple presently enjoyed by DMart) which was probably the most conservative multiple (something that I had covered in my last post as well) but the future can still see another leg of value unlocking.

What is a competitive advantage in Retail?

Well, for starters – there is no entry barrier in Retail.

What?

If you think of Retail and something like this comes to your head.

That’s not really Retail.

Well, for starters Retail can be broadly split between Modern Trade and General Trade. MT & GT.

When you think of the above picture, that’s MT. MT is still close to 10-12% of the total retail in India. 90% of Retail still takes place through the Kirana store or in an unorganized manner.

So the obvious question that should come to your head is –

What’s the big deal with Modern Trade?

Well, MT is looked as the future of Retail. While online retail still struggles to make money, MT is again a precarious industry to be in. For starters, you need to achieve a certain scale to command a negotiation advantage. DMart has been playing this game beautifully – keeping costs low, owning most of their stores (to have overheads lower), paying up suppliers in advance (more margin on the table) and at the end of the day offering a better price to the consumer.

While there was huge uncertainty around the Future Retail deal, it finally came through. Future Retail kept rescheduling their Board Meeting multiple times and the run up in the stock price had almost priced in what was going around.

The other thing to note here is that it is no surprise that RIL owns a lot of media assets to their name, something globally most of the billionaires end up doing (Think Bezos & The Washington Post). So when the whole speculation was ripe across multiple platforms, it should have been taken with a pinch of salt.

Let me re-iterate by saying that there is no point taking investing decisions basis ‘news items’. Efficient Market Hypothesis does suggest us that we are living in a semi-strong market so once something is out, it is probably already ‘priced-in’.

Ray Kroc, the legendary businessman behind McDonalds once remarked,

I’m not in the food business, I am in the real-estate business.

With the Future Retail deal, this could very much apply to what RIL is indeed planning to do. With Hamley’s already in their kitty, RIL could very well show the way for a global behemoth of Retail in the making (Future Retail tie-up with Seven 11 will roll-up to RIL).

You see, world over the whole shift from brick and mortar to Online also ended up going back to Brick and Mortar to finally an “Omni-Channel Retail”.

While the Brick & Mortar piece is appropriately sorted for Reliance, we might just see Amazon or Walmart join hands to make the Omni-Channel a reality. (Media Reports)

With this acquisition, RIL has not ended up with a good number of stores and a future enhancement in profitability. It might just have made the industry pivot from no – entry barriers to well, no-entry.

Where does that leave JioMart?

Going after the 90% pie of the retail is indeed an ambitious goal RIL has set for itself. Will the old execution prowess end up helping RIL in the current task at hand?

There has been mixed reviews both on the positive and negative side but is surely the first time RIL has set its sight on something that most of the folks earlier have failed to disrupt.

New Businesses

With the whole ecosystem around technology being owned by Reliance along with a big chunk of the real estate pie, we might see multiple data centres open up in the country.

While EU set the benchmark for Data Protection with GDPR in 2018, other countries are yet to follow suit. On account of Covid – 19, since Governments have to focus more on the pandemic at hand, whenever conversations resume, we might see this come through.

While we may see other players try and tinker in this space but RIL has practically left no room for any entry whatsoever.

There was also chatter around the introduction of pod taxis. As cities become more and more crowded, we might just end up exploring new modes of transport. Commercial projects that are currently live in the country are the Bullet Train and The Hyperloop. Will we see pod taxis?

My guess is again, as good as yours.

In the recently concluded AGM, RIL also mentioned about their big plans w.r.t. ed-tech. With India producing the most valued startup around ed-tech not being from the stable from RIL, can we see that get mopped up?

Succession Planning

Early last month, there was an article indicating RIL’s succession planning efforts underway. While Mr. Ambani has not officially indicated when he would be hanging up his boots, one also needs to appreciate what lies ahead.

We’ve already seen one level of re-organization of businesses take place by narrowing RIL to three segments – O2C, Platforms and Retail.

While Isha Ambani has been the face for Reliance Retail, Akash has been the face for Jio. That leaves Anant with O2C.

Recently, both Isha and Akash were nominated in the Forbes 40 under 40 most influential people.

With the RIL DNA running in the whole family, we might just see this play out effectively as the next leg of growth unfurls.

---

Confused? Hungry for more?

I have done an hour-long industry deep dive on the FMCG space followed by a detailed presentation on a company as a case study. Find out what people are saying about that here.

---

Subscribe to my newsletter here.

If you liked reading this and would love to read more, you can support this website by getting me a ☕ or 🍺 here.

Get the latest post alerts directly on your WhatsApp and Telegram. Click on your preferred app name.