Friends, in today’s Groww Stock Talk, let’s talk about a company that has doubled the
value for it’s shareholders every two years.
In 1977 if you had invested 10,000 rupees in that company, you would have over one crore
rupees today.
The same company runs oil business, also makes toys; has presences in the telecom industry,
and runs TV channels too.
Yes, we are talking about Reliance Industries Ltd.
This is the story of one such company that Indian entrepreneurs look up to, take inspiration
from, and consider their benchmark.
Then, what is wrong with this company?
Let’s look at each of its business sectors, segment-wise.
Jio, petrochemicals, refinery, retail, we’ll talk about them all, and see why its trades
have dropped from 1300 to 1100 in a month.
We are going to explain all of it to you— all the technical jargon related to this company.
First of all, I would like to talk about Jio, which came out in September 2017.
Investment in Reliance Jio had started from 2010 onwards.
But between 2010 and 2016, the stock price of Reliance Industries was stuck in a 700-1000
triangle.
This was because the company used to invest its profits from other business sectors like
refinery and petrochemicals into Jio.
By the time Jio was launched, the company had invested over 200,000 crores.
Talking about success of Jio, Jio has 34 crore subscribers as of today, making it India’s
largest telecom operator (yes, outnumbering subscribers of Vodafone-Idea which is 32 crores,
and Airtel which is 30 crores).
This industry has a metrics called ARPU, Average Revenue Per Person.
This number is falling on a sequential basis per quarter for Jio.
It doesn’t affect Jio because its users are rising.
When we multiple these two, ARPUxNumber of subscribers, we see that the revenue is increasing.
For Jio this number is 122 and rising, for Vodafone-Idea 108 and falling, for Airtel
it is 129.
To talk about the future of Jio, annual general meeting of Reliance Industries is scheduled
on 12th of this month.
The talk among everyone is that Mukesh Ambani will launch Jio Gigafibre, which is about
commercialising the product that is used in 1100 cities by a lot of people for free.
To commercialise means they will be charged for their usage.
The charges will boost profitability and bring growth in revenue.
That’s why this is a good idea for the company.
If you have used Gigafibre, you would know it is really good.
That’s how it’s going to benefit the company.
The benefits are showing, and the 200,000 crore before launch has now become 300,000
crores.
Now let’s talk about Reliance Retail.
Before that, I would like to talk a bit about growth numbers.
In July 2017 when the company came out with its quarterly results, the revenue from Reliance
Retail was 20,000 crores.
It has doubled to around 40,000 crores by this quarterly.
This is a growth of 3.5x in around three years.
Reliance Retail has grown rapidly with 50% growth annually.
The margins have increased by 0.8%.
If we talk about their competitors, Avenue Supermarts, which is the parent company of
D-Mart, run by the successful investor, Rakesh Damani.
They recently acquired Hemleys, which is a British toy brand.
They are having talks with Amazon about selling 26% stakes, because last year Walmart invested
in Flipkart and bought a major controlling stake.
Amazon has a remarkable presence in India, and they want to have physical stories and
brick and mortar segments now that Walmart is here.
Coming back to Retail, in the FMCG sector where there is volume de-growth happening,
but their EBITDA margin is still growing.
So we can understand how the company has grown rapidly.
It has over 10,000 stores in more than 6,000 cities.
Retail contributes around 15-20% to the total revenue of Reliance Industries.
Now, about petrochemical and refinery business under Reliance, which can be called their
cash cow, because it will continue to bring profit to the company.
This strengthens Reliance Industries to enter new sectors.
The news surrounding it are: Reliance Petrochemicals and British Petroleum(BP) will open 5000 new
retail outlets in India.
If you remember, Reliance used to have petrol bunks even 10 years ago which had to be shut
down because they were loss making units.
In 2014, government deregulated petrol prices, that is it is now market driven.
So the company adjust its selling rates according to the changes in the price of crude oil.
Reliance made a tactical in not doing this alone, but as a join venture with BP.
So, in case it fails, the company will not incur all the losses by itself but
share it.
The second news: Saudi Aramco is an oil refinery unit by Saudi Arabia.
Its value is around 2 trillion dollars.
2 trillion dollars is hard to explain.
So I’ll draw a parallelism: India’s GDP is around 2.7 trillion dollars.
So this company could generate about 75% of India’s GDP.
This company wants to buy about 25% stakes in Reliance Petrochemicals.
So we can assume that its future is looking bright.
Talking about numbers again, Gross Refinery Margin (GRM), is a matrix that runs in this
business.
For Reliance Refinery it is around $8/barrel.
It used to be $10.5/barrel until a year ago.
The price of oil has also fallen, but for other companies like ONGC and OilIndia, GRM
did not fall this low.
These are just minor hiccups.
It is safe to say that the future of Reliance refinery and petrochemicals is stable but
stagnant.
Yes, its growth is not extraordinarily high when compared to Jio and Retails, but its
stable and contributes about 40% of Reliance’s profits.
If everything is going so well, why has its share-price fallen from 1300 to 1160?
An interesting fact about Reliance Industries is that its S&P rating is BBB+.
This two notches higher than the Indian government-- which means there is a higher chance of the
government being defaulted than Reliance Industries.
We’ll talk about benefits of this later.
Coming back to the problems, company’s debt has doubled in the last two years.
The company has around 6,00,000 crores of capital expenditure
in its retail business and Jio.
About 3,00,000 crores alone is gone to Jio.
Its debt level is increasing fast, that signals problem.
Another problem is that the company is not focused on increasing its ARPU (Average Revenue
Per User), which is consistently decreasing.
Third problem: as I mentioned, Jio has good ratings.
The higher ratings are beneficial to Jio because it can raise capital from outside at lower
costs.
But recently the company has only raised capital from within India.
This has higher interest costs, if you were raising capital at 3% interest rates, you
are now raising it at 6-6.5%.
So the interest costs are increasing.
Problem number four: negative Free Cash Flow (FCF).
For the last 6 years free cash flow has been negative for Reliance.
Free Cash Flow is pulled from cash flow statement.
In the cash flow statement if you add such items that do not give you outflow, due to
depreciation, income taxes expenses and so on.
Every analyst and every investor looks at these metrics.
The company is not showing any signs of converting it into positive.
These are the minor hiccups about this company.
Should you invest in this company?
I gave you some facts.
Why don’t you more research and let me know?
There is another conglomerate which makes cigarettes, sells atta, and runs hotels: ITC.
We’ll talk more about these conglomerates.
We’ll simplify these complicated companies for you.
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Leave a comment below whether or not you will use Jio Gigafibre.