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Reliance's journey from OIL to JIO and significance of recent deal with facebook

Facebook buys 9.99% stake in Reliance Jio for Rs 43,574 cr in the largest FDI deal in India's tech space. Facebook has valued digital vertical of reliance INR 4.35 Lacs crore.


Let’s understand how Reliance has built such a big digital world.


As on March 2019 reliance Industries had total outstanding debt of more than 3 Lacs crore in balance sheet however in last 6 months they have paid debt of more than 50000 crore.


  • Let’s understand how biggest bet on debt by any company was well timed and planned and indeed well required to sustain in long term.

  • While oil prices is down almost by 50% amid COVID-2019 Almost all the oil companies are facing challenges but reliance industries’s is growing like anything.

  • Is’t it the biggest diversification ever at the right time by any company by far? - Probably yes.


Refinery and petrochemical business of reliance was cash cow from many years but with low cost oil and gas extraction from shell, United states become net exporter of oil.


With world moving towards electronic vehicle and USA being a net oil exporter, Oil prices started falling down and sustained at low levels.



Reliance was (and is) one of the cheapest oil refinery in the world and was fully dependent on oil and petrochemical business. As on March 2012 100% of the company’s profits was coming from petrochemical and refinery business.


Mr. Ambani identifies that they have to reduce concentration on oil and refinery to sustain and grow in long term.


Mukesh Ambani is known for big scale revolutionary business. He has identified two big opportunity-


  • Unorganized to Organised- To be India’s largest retail chain. And started reliance fresh, reliance retail and gradually entered into fashion, footwear, electronics and jewelry business. They have allocated big capital and opened nationwide retail stores.

  • Data is new Oil- Once retail business established and become profitable they have allocated big capital into data business and started reliance Jio

  • From OIL TO JIO-



They have completely revolutionized the telecom industry with fat capital expenditure. They made all the calls, messages completely free and charged only for data usage.


How Jio changed the telecom industry indeed not just telecom but the entire entertainment and media industry-


With high speed internet across the India they have created entire media and entertainment industry around it and become market leader in Media sector as well.


New Reliance-

Reliance industries limited. India’s largest company by profit and market capitalization was known for oil and petrochemical business now serving 6 wide Industries namely -


1. Petrochemical

2. Hyper-mart

3. Styling

4. Digital Services ( Not just telecom)

5. Media & Entertainment

6. Toys and

7. Business enabling.


The total no. of unique businesses that these industries cover is 28


That’s huge. From a pure-play petrochemical and refining company, now touching every aspect of your life and soon our lives will be “Reliance Dependent”


Let’s us deep dive into how you use services of reliance in some or other manner in daily life-


Reliance Industries, India’s largest business to business company (B2B) is now becoming consumer facing company (B2C) - How -


  • Earlier reliance was having Vimal ( Clothing) Recron ( Pillow) and some other small retail brands which anyways people were not aware of

  • Over a time Reliance has built solid B2C brands.

  • While it has created brand like Jio, Reliance fresh, trends and other they have acquired some consumer facing brands in Media and entertainment.






Digital-



From net cash to highest debt in country- Reliance has taken huge debt to build both the business. It became the largest company by debt in India having debt of more than 3 lacs crore in balance sheet.



New capital allocation- As on date segment assets of digital business being Reliance Jio is more than refinery and petrochemical business.



And here is the outcome-

Profit- And result is here, both retail and digital segment is not only profitable but also making good ROCE. Net profit from digital segment is now more than 10000 crore P.a. At Operating level digital (Jio) segment is making quarter of the consolidated profit.



Quarter - III Operating performance-

Net profit FY 19 -



Conclusion-

Now Reliance industries is done with the capital expenditure. Even with the lower oil prices they might have pressure on refinery margin but with country wide retail fuel station network and diversification in retail and digital segment. reliance is well placed and making net profit of more than 45000 crore. They have set a target to be a net cash again in next 3 years.


Recent deal with facebook is just one step towards becoming net cash .


How does that create a bigger win for both?

  • Can be a gateway for Facebook & Whats app for the wider payment services enablement as they can make some bundled offers

  • Amazon, Netflix all flourished due to low cost of data. With Jio a control at source can be a possibility (though low chance)

  • If Reliance Retail (though not a part of Jio platform, but a partnership can be made) can be bought to your phone through Whatsapp.

  • This can be huge and can affect many online grocery and online shopping startups


Perhaps Reliance’s big bet on debt is the best decision they have made to sustain and grow.


Really at Reliance GROWTH IS LIFE…


Regards,

Gourav Gupta

For any query you can reach out to me at gourav@equialpha.com

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©2019 by Equialpha Wealth Advisers