Reliance Industries Ltd. - Poised for some interesting times ahead

Look at Reliance Industries Ltd. It is amongst the largest companies in India on several counts. With Annual Revenues of about Rs.4.50L crores, Net Profit of over Rs.23K crores & a Market Cap of over Rs. 3L crores, it certainly is a Mega corporation. But look at it's current businesses. Over 90% of the company's revenues and about 80% of profits come from Refining & Petrochemicals business. And these businesses are not posting any handsome growth for the last many quarters. At best these businesses will grow in single digits or low double digits in the coming quarters.

A few years ago Reliance Industries Ltd stepped into new businesses of Oil & Gas production and Modern Retail. As we all know the Oil & Gas production business of the company has been a big disappointment mainly because the initial estimates & projections were very large & exciting, but the actual numbers have been quite lacklustre in comparison. Nevertheless this business is chugging along & profitable too. But it is difficult to predict if this business will grow to a much larger scale or not. Reliance's Retail business did have a false start initially, but the company has done well to make a smart comeback over the last 2-3 years. Reliance is now India's largest Retail company, having overtaken Future Group a few quarters ago. Eventhough the Retail business is currently contributing only about 3-4% of Reliance's annual turnover, it is growing at a healthy pace of about 15-20%. And the better news is that the business has reached break-even too at the operating level. With further expansion the economies of scale will further help the company improve profitability and sooner or later it will start posting Net Profit too. Reliance Retail already has over 2000 stores operational across all formats and cater to millions of customers across several large cities.

Now lets come to the most interesting part of Reliance's large investments: Broadband. Many of us have been hearing about Reliance Jio Infocom (RelJio) being the only company to hold broadband wireless spectrum across the country. We have been hearing this for the last over 4 years now, but we haven't seen any launches happening. As per regulatory requirements, RelJio needs to launch it's services in all service areas latest by second half of 2015. What was the company doing sitting idle with all that spectrum for nearly 20% of the license period?? Frankly I think it was an intelligent move. 4 years back the LTE technology was still at an experimental stage and all it's equipment were very expensive. Thanks to this delay, RelJio will be able to install equipment which is better evolved and at much lower prices. The technology is still very new even at a Global level, but availability of it's equipment is now much much better than what it was 4 years back. Over the last 3-4 quarters, the activity at RelJio has shot up with the company first signing up agreements with almost all Tower companies & then signing agreements with Equipment Vendors for implementation of BTSes across the country. The company has been laying it's own OFC across most of the important cities as it is anticipating a huge load of data traffic on it's Wireless Broadband network. The company had paid something like Rs.12K crores for the Broadband spectrum, but it is investing well over Rs.50K crores to setup all the related infrastructure across the country. These numbers are not too short of what any other Mobile Operator has invested in Infrastructure for a nationwide rollout. Going by these numbers, RelJio is planning to launch it's services in thousands of cities & towns and lakhs of villages in the very first year itself. To make things even more interesting RelJio has bagged 1800 MHz spectrum in 14 important circles, which can help the company jump right into regular mobile service competition as well.

I am expecting RelJio to launch it's services on 28th December'2014, Dhirubhai's anniversary and the phased rollout will happen over the first half of 2015. As per my estimates RelJio will be targeting to achieve Quarterly turnover of Rs.4K crores within the first 4-6 quarters of launch. RelJio could be posting a turnover of about Rs.10K crores in FY'2015-16 itself and will be close to breaking even at EBITDA level. Within a few months of RelJio's launch we should see a price-war in the Data business. If RelJio's service experience is good, then even a price-war cannot stop the company from capturing substantial incremental as well as existing market share from all other operators. RelJio could touch 10% market share figure in the Data business within the first 4 quarters itself, provided the initial customers are happy with the company's services. If there is a neutral-to-positive word-of-mouth about RelJio's services in the first 2 quarters, we could see many customers jumping from other operators to RelJio's networks to enjoy faster speeds and larger usage limits. The first 2-4 quarters from launch are going to be crucial.

If everything works out fine, we could see RelJio touching the Rs,50K crores turnover mark within the first 5-6 years and by then the company will be generating healthy Cash Profits and Net Profit too. The Retail business expansion alongwith the huge potential in the Telecom business is what will bring the exciting times for Reliance Industries Ltd & it's shareholders. The company's stock has been underperforming for the last many years now. There have been valid reasons for the same. The revival in Indian economy will also help boost demand for RIL's petrochemical products and who knows the company could get back into fuel-retailing in a big way too in the coming couple of years. There are many potentially positive things that could happen with the company. The stock price which has been languishing in the Rs.700 to 1100 range for all of last 6 years, finally could breakout above the Rs.1100 price levels in the coming quarters.

Side-effects of Crude Oil Price correction

Over the last quarter or so, the International Crude prices have come down from levels of about $110-115 range to now under $90, i.e. a fall of over 20%. The $ value too has remained relatively steady in the Rs.60-61.50 range. India imports nearly 80% of it's Oil & Gas requirement and any change in the International price has a bearing on the overall cost-of-living of all citizens, directly or indirectly.

The Petrol prices in our country were completely deregulated over a year ago, which led to the retail prices shooting up past the Rs.80/litre mark a few months ago, when the Crude Oil prices were in the $110+ range. Over the last couple of months, we have seen Petrol prices being reduced regularly and are now lower by about 8-9% from it's peak levels. It's obvious that the PSU Oil companies which control almost the entire fuel-retailing market has not passed on the complete benefit from the falling crude prices, which had corrected more than 15% from it's peak at the time of last revision. They are certainly keeping some cushion, i.e. extra profits to themselves, maybe to compensate themselves for the difficult period they spent when the retail prices were forcibly kept at below-cost levels by the government. And the other factor is that there is no real competition in the market. IOC, BPCL & HPCL all are government owned (majority stake) companies and they can easily form a cartel to decide on the retail prices during each revision. They can discuss on how much benefit to pass on & how much to retain with themselves. The private sector fuel retailers were lying dormant for many years when the fuel prices were under regulation & it was a loss-making business. Since last year, Essar Oil & Shell have started seeing lots of activity in their retail operations, atleast for sales of Petrol. Since the last 2 months, the regularly-revised Diesel prices too have reached the market-rate levels. And deregulation of Diesel prices will be officially announced very very soon. This has now prompted the private fuel-retailers to seriously start re-opening their old outlets & even think of starting new outlets. Reliance Industries too has started operations at it's company-owned outlets and will expand operations at dealer outlets as well sooner or later.

Now the question is: How do we benefit from all this?? While Petrol prices were being raised as per market rates & the Diesel prices were raised at the rate of 50 paise/month, the overall cost of all goods we consume was going up as fuel prices directly impact transportation costs. Even our cost of commute was going up irrespective of the fact whether we used public transport or own vehicles. All this had a direct impact on the Inflation & hence on our expenses & hence our savings and investments. Even while all this was going up, there was a small indirect benefit we had. As Diesel prices were raised in steps, the overall subsidy burden on the government was going down in steps. This will have an indirect impact on our lives as the government will have more funds available for public projects and maybe they might not need to raise tax burden on us in the subsequent budgets. This benefit is neither quantifiable nor seen by us immediately. But we do get it over a period of time.

Now lets look at the situation where we are in now, i.e. the International Crude prices are falling, which has led to reduction in Petrol prices and the Diesel subsidy going to Zero and infact we could be seeing a reduction in Diesel prices very soon. All this is Doubly Positive for all citizens of India. Every reduction in Diesel prices will have a direct impact on cost of goods we consume & our travel costs. This will ultimately bring down the inflation levels, will reduce pressure on our expenses & possibly we will be able to save more & invest more. At the same time the Govt will be freed from Diesel subsidies, which was a substantial portion of the annual budget until last fiscal. This money will be ultimately used to build public infrastructure & other public projects.

Another positive side-effect of all this is the possibility of Loan Interest rates going down. RBI, which periodically announces it's monitory policy, has been concerned about the high inflation levels we had seen for the last 5-6 years. And hence RBI had kept tight control on the liquidity available in the Financial System. This led to the loan interest rates remaining at a higher level. Thanks to the reducing fuel prices, we could see Inflation coming down in the coming months. This could allow RBI to increase the availability of liquidity in the System, which will ultimately allow banks & other financial institutions to reduce interest rates charged on all types of loans. And once this happens, this will further boost economic activity across the country.

India's economy as a whole has HUGE benefits coming it's way if the Crude Oil prices continue to remain at levels below $95 per barrel. Anything lower and it's an added bonus. These benefits will start reflecting in the overall economic activity & the performance of different companies from various sectors, with a lag effect of atleast 2-3 quarters. The stock markets sooner or later will start factoring in these potential improvements. This current correction in the markets should be taken as an opportunity to invest.

Few companies in India will not benefit from the falling Crude prices and they are mostly the Oil & Gas producers. So companies like ONGC, Cairn India, Oil India, etc. which derive most of their income from producing & selling Crude Oil and Natural Gas will be in the list of non-beneficiaries.