Reliance Industries - Big Brother on the move

[protrade]

Yes, it is profitable... But its not the success story in the scale it was imagined to be..coming from the biggest company in India..

This is classic - most people think Reliance Retail is about Reliance Fresh, and its bigger brothers, plus Reliance Digital, Trends, Timeout, Footprint.

But the reality is, Reliance Retail is way way bigger than that. Do you know the iStore (Apple products) is operated by Reliance Retail? How about Marks & Spencers? Hamleys? Brooks Brothers? Diesel? Timberland? Payless Shoe Store? Quiksilver? Steve Madden? Roxy? Kenneth Cole? Pink? Asics? There's a growing list of over 35 top brands from overseas that are operated by Reliance Retail! In fact, while these stores don't contribute much in terms of Revenue, they contribute big to the profits of Reliance Retail.

Today Reliance Retail is the largest lease holder of A-grade commercial real estate in India - and pretty much any mall, any main street location would be having significant presence in Reliance Retail. Imagine the bargaining power they get from this sort of buying power!

Out of the retail points of presence of 3800 at last count, almost 300 stores are these high end brands - where Reliance makes a profit even if the store doesn't see a single customer in the entire year!! This has reached a point where anyone looking to enter India simply doesn't bother talking to any other player - and talks only to Reliance Retail. They have perfected the entire process, starting with documentation, acquisition of prime real estate, setting up interiors, logistics and delivery, plus staffing and operations. Every thing is streamlined so beautifully that someone looking to launch stores in India has no reason to talk to anyone else!

Even Jio - why do you think Reliance had the network ready but instead of going in for commercial launch, decided to do testing for over a year? Last year in September, CLSA came out with a report saying Jio can launch any day - and they waited for one year after that. The reason is simple - they wanted to perfect the customer experience. They wanted things to be streamlined. This has obviously cost them a lot of money in terms of delays, lost revenues, interest costs, etc, but they don't care. They know if they do a great job, the customers will come.

If you think Reliance doesn't get B2C, or Reliance doesn't get Customer Service, think again. These are the top brands in the world in terms of Customer Care - and it doesn't get much better than Apple as far as Customer Satisfaction is concerned.

Yes - in the past Reliance had legitimate complaints against it for Customer Service - but that has been addressed right from the top most levels all the way down.

 

[protrade]

Protrade, That's one side of the story, good though it is, there's another view point as well.

In the past, Reliance flourished and grew multifold because it dictated the policies of the government, which gave it a huge advantage. Now, in this day and age, it is not possible for Reliance to have such over arching leverage, and so Reliance will have to compete on same terms with it's competitors. Having deep pockets and financial muscle is a plus for Reliance, however, it not always need be the case. The quick change in technlological trends, evens out the field where big size may turn out to be a liability. Case in the point is Reliance's investment of thousands of crores in CDMA technology thru Reliance Telecom, which has proven to be a flop. The other part of its lakhs of crores investment is in retail. Here too, Reliance will have to compete with established online giants such Amazon, Flipkart etc. As regards to physical stores, there are entrenched local chains such as Dmart, Big Bazzar in Mumbai, and many such in different states. And not to forget, late entry is a problem where real estate cost an arm and a leg. Also, Walmart's entry is yet to come.... So in essence, Reliance inspite of its huge investments fructifying in telecom and retail, will have less returns now as compared to what it has in the past.... and once a company reaches a peak of growth curve, economics dictates that there can only be marginal returns. So personally, am not having great expectations... Just my view...

DSM, Jio has learnt from all the mistakes of the past. And this time around, they are more future ready than any one else. If you think this game is about Telecom, or this game is about Devices, you are not getting the picture at all. The entire telecom network, and the money Jio makes out of the millions of users and their monthly bills, or from selling devices, is just what is needed to pay the bills.

The real game for Reliance is not just against Bharti, Idea or Vodafone. The game Reliance is playing is against Google Play Store and Apple App Store. The game Reliance is playing is against Amazon EC2. They want to own the game of Movies, Songs, Magazines, Games, etc. They want to own Data Centers and hosting. They want to own the last mile.

This is a vision that is simply stunning - in terms of scale.

And Reliance Retail is also playing a totally different game - which most people don't realize.

For every other player, this game is about Return on Investment - and there your point about Marginal Returns being the maximum anyone can expect, is true. But just look at the situation here - Reliance spent Rs 150,000 crore on Jio, It spent almost Rs 50,000 crore on Reliance Retail, it spent over Rs 100,000 crore on new initiatives in its core Hydrocarbon and Refining business. But the net debt is still just over Rs 100,000 crore if you subtract the Reliance Treasury assets.

Well within 3 years, cash profits from all its operations would completely wipe out that debt! So at that point, Reliance would be largest telecom player in the fastest growing market in the world, largest retail player in fastest growing retail market in the world, and the largest refining and hydrocarbon player in the world, with zero debt on its books! And they have some investments in other areas - like Life Sciences, etc which could become mega-plays in pharmaceuticals.

In 3 years time, Reliance is expected to be minting Rs 50,000 crores EVERY YEAR in CASH profits - with ZERO DEBT. Whether its Amazon or Walmart or whoever, the only player who can compete against them and give them a run for their money would be Reliance.

Maybe their past success was because of their clout in the government - but in the future, they aren't dependent on that. Even over last 7-8 years, Reliance has not had any clout - their bills for KG-D6 expenses haven't been cleared - while they have been stiffed with over $550M in profit petroleum compensation! ONGC has a strong case against them for gas migration, and it has dragged on forever. Many state governments have acted against Reliance interests in Grocery stores, etc. Their gas stations were shut for almost a decade because only PSU marketing companies were eligible for the subsidy.

 

[deba72]

This is classic - most people think Reliance Retail is about Reliance Fresh, and its bigger brothers, plus Reliance Digital, Trends, Timeout, Footprint.

But the reality is, Reliance Retail is way way bigger than that. Do you know the iStore (Apple products) is operated by Reliance Retail? How about Marks & Spencers? Hamleys? Brooks Brothers? Diesel? Timberland? Payless Shoe Store? Quiksilver? Steve Madden? Roxy? Kenneth Cole? Pink? Asics? There's a growing list of over 35 top brands from overseas that are operated by Reliance Retail! In fact, while these stores don't contribute much in terms of Revenue, they contribute big to the profits of Reliance Retail.

Today Reliance Retail is the largest lease holder of A-grade commercial real estate in India - and pretty much any mall, any main street location would be having significant presence in Reliance Retail. Imagine the bargaining power they get from this sort of buying power!

Out of the retail points of presence of 3800 at last count, almost 300 stores are these high end brands - where Reliance makes a profit even if the store doesn't see a single customer in the entire year!! This has reached a point where anyone looking to enter India simply doesn't bother talking to any other player - and talks only to Reliance Retail. They have perfected the entire process, starting with documentation, acquisition of prime real estate, setting up interiors, logistics and delivery, plus staffing and operations. Every thing is streamlined so beautifully that someone looking to launch stores in India has no reason to talk to anyone else!

Even Jio - why do you think Reliance had the network ready but instead of going in for commercial launch, decided to do testing for over a year? Last year in September, CLSA came out with a report saying Jio can launch any day - and they waited for one year after that. The reason is simple - they wanted to perfect the customer experience. They wanted things to be streamlined. This has obviously cost them a lot of money in terms of delays, lost revenues, interest costs, etc, but they don't care. They know if they do a great job, the customers will come.

If you think Reliance doesn't get B2C, or Reliance doesn't get Customer Service, think again. These are the top brands in the world in terms of Customer Care - and it doesn't get much better than Apple as far as Customer Satisfaction is concerned.

Yes - in the past Reliance had legitimate complaints against it for Customer Service - but that has been addressed right from the top most levels all the way down.

Please also elaborate on why the markets have not given any value ( or rather deducted values ! ) over last 8 years to all the supposedly "big" things that Reliance is supposedly doing.. with all the big profit churning businesses, with all the big capex spending and all the big brands,products and services that it operates, why the shareholders have only seen their wealth depreciating ?

 

[protrade]

Please also elaborate on why the markets have not given any value ( or rather deducted values ! ) over last 8 years to all the supposedly "big" things that Reliance is supposedly doing.. with all the big profit churning businesses, with all the big capex spending and all the big brands,products and services that it operates, why the shareholders have only seen their wealth depreciating ?

Good question - and the answer to this question will reveal a 100 things about the Indian psyche.

About a month back, I attended a conference, where Nandan Nilekani was the Keynote speaker. This was about the launch of the India Stack. And when Nandan Nilekani announced the details of the launch of the India Stack, the entire audience was stunned - this wasn't something any one expected that India would pioneer - this was something typically one expected would be launched first in the West, or maybe in Singapore or Japan - and then years later, India would copy it.

And one person in the audience actually asked the question - how come such a fantastic thing like the India Stack has been created, but no one knew anything about it?

Nandan's answer was quite simple and stunning. He said 6 years back, in 2010, I told people that UIDAI would issue 1 billion Aadhaar cards in 5 years time. We were late by 6 months, but today we have issued 1 Billion Aadhaar cards. People never believed us - and every step of the way, they just kept searching for various things they could point fingers at to ridicule the effort.

In 2013, the Aadhaar Payments Bridge was launched, and today, whether it is LPG Subsidy, MNREGA payments, Student Scholarships, etc, all are made using the Aadhaar Payments Bridge. People never accepted that this would work - and today this is working around the country.

In 2014, when Aadhaar based eKYC became live, people said this won't work - even though it was already working!

Today literally tens of millions of people sign their Tax returns electronically, using eSign services - every single tax payer is aware of this, and has used it - but they still don't realize what the significance of it is!

As late as 2016, when the final component of the India Stack was live - the Universal Payment Interface - even now, when we tell people you can pay and receive money into your bank account using just your phone number or email address, people don't believe.

It is not that we haven't done the job, or we did this all secretly. All of this was announced 5 years back, and we have done this - but people never believed that we can do this. Today when we have done it, people like you question how this happened all of a sudden!

In the same way, everything Reliance has been doing, it's not a secret - it has been announced every step of the way. People simply assumed this won't work, it will fail. Even today, on this very topic, people's messages show clearly that they don't believe Reliance is capable of good Customer Service.

Market is nothing different - it is people like you and me only. Even market didn't expect Reliance to pull this off. Even today, market doesn't expect Reliance to pull it off.

The thing is, Indians have a problem - whenever anyone in India does anything spectacular and different and first - we cannot believe.

Just look at Mangalyaan - there will be literally millions of sceptics who will doubt whether ISRO really managed to go to Mars so cheap! Same for Chandrayaan! Maybe next time ISRO should take all these sceptics to Mars, and leave them there - then they will believe. And India will be a better place without them!!

 

[protrade]

Just to give another example - Apple is easily the most successful company in the planet, by any measure. And even today, they are only slowing down compared to the hot pace they set for themselves in the past.

Apple spent literally Hundreds of Billions of Dollars on buying back its own shares, but still the shares aren't much higher. So people will obviously complain that Apple should not have invested that money in buying back its shares, it wasted the money, etc.

In same way, people will say, Reliance should not have invested money in Retail or Jio - see, share prices haven't gone up.

Somehow the market is only capable of evaluating companies on only a quarter to quarter basis. Whenever any company operates in a different way, and tries to perform on a decade to decade basis, the stock market simply is not capable of understanding that company.

Except possibly Amazon - that is the only company where investors have bought into the vision of Jeff Bezos spanning decades, and give the company huge valuations.

Within the next 2-3 years, if Jio and Retail don't need further capex, I would expect Reliance to spin these off into separate companies - and at that point, I wonder what the market cap of Jio and Reliance Retail would be! And I wonder how much lower the market cap of Reliance Industries without Jio and Retail would be.

As it is Reliance is trading just over 10x earnings - and if you take out Jio and Reliance Retail, the earnings would not drop much at all. It would be an interesting exercise, even if only intellectually relevant today.

 

[deba72]

So the gist that I can understand from your detailed reply ( really good way of presenting your viewpoints ) are basically two points :

1. Pre 2008, throughout '80s,'90s and till 2008.. market was intelligent and efficient enough to understand and reward the business model of Reliance. I ,myself,have benefited from it from 1997-2008 when I received almost 40 times return on my investments. For some strange reasons, market has stopped understanding the value of Reliance from 2008 and the market has suddenly turned dumb...

2. However, during the same period (2008- till now ), market has remained knowledgeable and efficient enough to understand the businesses of HDFC twins, Asian Paints, ITC etc etc ( a long list actually ) and suitably reward their stakeholders..

Quite a strange phenomenon, indeed !

 

[TracerBullet]

So the gist that I can understand from your detailed reply ( really good way of presenting your viewpoints ) are basically two points :

1. Pre 2008, throughout '80s,'90s and till 2008.. market was intelligent and efficient enough to understand and reward the business model of Reliance. I ,myself,have benefited from it from 1997-2008 when I received almost 40 times return on my investments. For some strange reasons, market has stopped understanding the value of Reliance from 2008 and the market has suddenly turned dumb...

2. However, during the same period (2008- till now ), market has remained knowledgeable and efficient enough to understand the businesses of HDFC twins, Asian Paints, ITC etc etc ( a long list actually ) and suitably reward their stakeholders..

Quite a strange phenomenon, indeed !

I dont have any opinion/understanding on this, but strange things do happen . A smaller scale example - Ajay Piramal has very good reputation and track record, yet Piramal Enterprises was trading cheap for few years. Once things got more clear and some indications were made about separating subsidiaries , PEL is running up nicely.

Anyway if and when this reflects in actual earnings, markets will catch up.

 

[deba72]

I dont have any opinion/understanding on this, but strange things do happen . A smaller scale example - Ajay Piramal has very good reputation and track record, yet Piramal Enterprises was trading cheap for few years. Once things got more clear and some indications were made about separating subsidiaries , PEL is running up nicely.

Anyway if and when this reflects in actual earnings, markets will catch up.

My understanding of markets however is slightly different...

Markets don't assign values to a stock after the 'actual' earnings start happening... on the contrary, current price of a stock is derived from its future earning potential...

People ....who think market is 'dumb' and complain about why it is not understanding the value of a particular company....have been proved wrong again and again... over last few centuries...

If market gives premium to a stock..it has "definite" reasons ( sometimes may be unknown to general public )... and when it doesn't give value to a stock...again there may be "definite" ( & possibly sometimes unknown ) reasons for the same...

At least I, myself, never question market's wisdom !

 

[monkeybusiness]

My understanding of markets however is slightly different...

Markets don't assign values to a stock after the 'actual' earnings start happening... on the contrary, current price of a stock is derived from its future earning potential...

People ....who think market is 'dumb' and complain about why it is not understanding the value of a particular company....have been proved wrong again and again... over last few centuries...

If market gives premium to a stock..it has "definite" reasons ( sometimes may be unknown to general public )... and when it doesn't give value to a stock...again there may be "definite" ( & possibly sometimes unknown ) reasons for the same...

At least I, myself, never question market's wisdom !

Heard rumors few days back on street, few years back reliance has made private placement of 3 crore shares @1200/1300/1400 to some FII, FII is desperate to get out of this dead investment @ purchasing price. Some one dosn't want to see this free float in market, hence price are hammered when it comes close to 1100. See the range for last 8 years.

 

[protrade]

So the gist that I can understand from your detailed reply ( really good way of presenting your viewpoints ) are basically two points :

1. Pre 2008, throughout '80s,'90s and till 2008.. market was intelligent and efficient enough to understand and reward the business model of Reliance. I ,myself,have benefited from it from 1997-2008 when I received almost 40 times return on my investments. For some strange reasons, market has stopped understanding the value of Reliance from 2008 and the market has suddenly turned dumb...

2. However, during the same period (2008- till now ), market has remained knowledgeable and efficient enough to understand the businesses of HDFC twins, Asian Paints, ITC etc etc ( a long list actually ) and suitably reward their stakeholders..

Quite a strange phenomenon, indeed !

The market has never really rewarded holding company structures, even when companies are operating successfully, and profitably. And in case of Reliance - for multiple reasons, it has become worse than a holding company structure - because these investments are totally unrelated to the core Hydrocarbon/Refining business of Reliance.

Secondly, Reliance invested huge amounts of money on KG-D6, and the return on that became iffy in the period from 2012-14. In 2016, Reliance was even ready to give up its rights to some blocks in KG-D6. Reliance has always played the long term game - it has no issues with KG-D6 continuing to languish for years together - and when it makes sense, it will once again kick-start that business. When Reliance does this on its 1400 gas stations, its one thing - but doing this with a massive investment like KG-D6 is something investors cannot stomach easily.

The typical analyst who covers Reliance is not a Telecom Analyst or a Retail analyst. Because all the money still comes from Refining and Petrochemicals, it is covered by the Oil/Gas Analysts. This means that no one really understands Reliance any more.

And in the face of this lack of understanding, they were spending humongous amounts of money on capex. And to top it all, there is this major confusion about Debt levels - why does Reliance have almost Rs 100,000 crores in Treasury Operations, and does it make sense to use that Rs 100,000 crores to lower the gross debt?

Point is simply this - if you want a steady and predictable game, companies like Reliance aren't going to suit. But if you like mega bets, bold vision, readiness to back that vision with serious money, willingness to take the setbacks and wait it out, etc, then Reliance is the game to play. And this is the only company that has the execution capability to pull things off at this scale.