Traditionally Reliance Industries Ltd. (RIL) has always been known as the Indian behemoth with Global scale operations in Crude Refining & Petrochemicals businesses. Over the years RIL has expanded capacities in these businesses every 2-3 years and has now reached such a scale of operations that can be counted amongst the biggest across the world. Between FY'05 and FY'14, RIL's Total Income has expanded over 6 times to touch a level close to Rs. 4.50 lakh crores with 70% of it coming from the Refining business & 20% from Petrochemicals business.
But RIL has seen it's profit margins decline over the recent 3-4 years. In FY'11, RIL's consolidated EBIT margins were a little over 10%, while in FY'14 it had dropped to just over 7%. This was one example where the economies of scale theory did not work well. But a lot of it was because of substantial volatility in prices of products that RIL deals in, both on the raw material side as well as the end product side.
RIL has drawn a huge CAPEX plan for it's Refining & Petrochemicals businesses mainly aimed at improving efficiencies & ultimately improving margins. All these projects are expected to start showing impact on it's numbers from the second half of FY'16 and will be fully visible by FY'17. In December'14 quarter, RIL's EBIT margins in Petrochemicals business was almost 9%, the best figure in over 2 years, while that for Refining business was 4%, substantially lower than the best number it has seen in last 2 years. The new CAPEX plan is expected to boost it's EBIT margins by atleast 1.5% to 2%.
Enough of discussing RIL's primary businesses. Now let's completely focus on RIL's newer businesses, which it has entered and scaling up over the last few years. These business segments are: Oil & Gas production, Modern Retail and then the 'Others' segment, which comprises of Textile, Media, Broadband & other investments in Associate companies. In the June'13 quarter, these 3 business segments contributed Rs.7763 in Revenues & Rs.674 crores in EBIT. In December'14 quarter, i.e. in 6 quarters from then, the total contribution to Revenues jumped to Rs. 10,974 crores and Rs.1213 crores in EBIT, a jump of 41% and 80% respectively in just one & half years.
Out of the Total Revenues & EBIT from the 3 business segments, the Oil & Gas business alone contributed about 26% of the Revenues & 68% of EBIT in December'14 quarter. This is despite the fact that the Oil & Gas business suffered a huge drop in Crude Prices during the December'14 quarter. RIL's investments in Shale assets in US are paying healthy dividends currently. The Oil & Gas assets in India are not doing so well with flat to negative growth in production numbers in most assets. The revenues & profits from Oil & Gas business would have been much higher in December'14 quarter if Crude prices had not collapsed so much. Crude prices tumbled from $110 per barrel levels to $45 per barrel during that quarter. Since January'15, the crude prices have improved and are now hovering around the $55 to $60 levels. This business enjoyed EBIT margins of about 29% at a time when the prices were tumbling fast. So we can safely assume that profits will be decent even when Crude prices hover in the $50 to $70 per barrel range.
RIL's Retail business has continued to post healthy Q-o-Q & Y-o-Y growth over the last 3 quarters. The company has got aggressive on it's Retail footprint expansion & marketing. Even consumers seem to be shopping more in the recent months. And the best news is that RIL's Retail business has seen improving profitability in the last 3 quarters. From an EBIT of Rs.24 crores on a Turnover of Rs.3653 crores in March'14 quarter, the business has seen an EBIT of Rs.133 crores on a Turnover of Rs.4686 crores in December'14 quarter. With the Indian economy picking up pace, Inflation going down, we can expect the overall consumption demand to continue growing in the coming quarters & years. Apart from Retail stores, RIL will start e-Retail in a big way sooner or later. It has already started testing it via www.RelianceFreshDirect.com where consumers in Mumbai can make online purchases of Grocery & other Daily need items. With a vast nationwide presence, RIL can easily spread this business in many more cities over the next 1-2 years. There is immense scope for growth in almost all of RIL's Retail formats, once they get integrated with an e-commerce platform. Going by the recent growth rates, this business is expected to cross the Rs.20,000 crores in Annual Revenues mark before December'15.
Coming to the other businesses, I don't have the exact details of the performance of RIL's Textile business or investments in other Associate companies, which have been counted in the 'Others' segment. But it is more important to see 2 other important parts of this segment, i.e. Media & Telecom. We all know RIL is preparing for a mega launch of it's 4G-based telecom services, with a big push towards offering high-speed Internet services across 5000 cities & towns and lakhs of villages across the country. In order to be able to offer other complimentary services, RIL acquired majority stake in Network 18 Media & Investments Ltd. in June'2014. With this acquisition RIL is now the owner of a host of digital properties & TV Channels. Some of the popular constituents are TV Channels like Colors, CNBC TV18, CNN-IBN, IBN7, CNBC Awaaz & digital properties like HomeShop18.com, BookMyShow.com, Moneycontrol.com, etc. Revenues from this business probably started getting consolidated into RIL's 'Others' segment from Sept'14 quarter, i.e. Q2. This business reported revenues of about Rs.745 crores in Q2 and Rs.830 crores in Q3. So the jump we see in revenues of this 'Others' segment from Rs.1700 crores level to about Rs.2500 crores level in Sept'14 quarter is because of addition of Network 18 revenues.
The interesting part is that the 'Others' segment saw another big jump in revenues in December'14 quarter to over Rs.3400 crores level. I am speculating that this jump is because of RIL's Telecom & Broadband business. We have read that RIL has already done soft launch of it's Jionet WiFi services in nearly a dozen large cities, mostly in busy business areas of those cities. Each user logging on to Jionet WiFi service during this soft launch period is entitled to receive initial Free Usage limit, after which they will have to pay for usage. Reliance Jio Infocom (RelJio) had launched it's WiFi service in some parts of Ahmedabad, Surat & Baroda about a year ago. Apart from that there have been reports that RelJio has softlaunched it's WiFi service under the Jionet brand in several cities like Indore, Bhopal, Varanasi, Kolkata, etc. Apart from these WiFi Hotspots, RelJio has been showcasing it's WiFi service at several popular Trade Fairs and large College Festivals. There was one recent report which said that the Average Data Usage per customer at it's WiFi Hotspots is over 100 MB per day. Another report said that RelJio has applied to BEST in Mumbai for usage of it's Street Light poles to install it's WiFi equipment, which will enable the company to launch it's WiFi service over a much larger coverage area. I am sure RelJio will be using many such innovative techniques to ensure maximum WiFi coverage so that it's service becomes the primary medium of Internet access for maximum number of people. Reports suggest that the Commercial launch of RelJio's 4G and WiFi service should happen in April'2015.
The above chart shows the Capital Employed at the end of each quarter in each of the 3 business segments of RIL which I have discussed in this report. The Capital Employed in the Oil & Gas business has gone up from about Rs.53,000 crores in June'13 to about Rs.70,000 crores in December'14, majority of this extra Capital has gone into the company's Shale assets in US & Canada. These investments will reflect in substantial revenue additions in the coming quarters, provided the Crude prices remain above $50 or $55 per barrel level. The Retail business has negligible Capital Employed at around the Rs.6000 crores level, which suggests that the business is being run in a very Capital efficient manner. Despite strong growth in the number of stores and the stocking up of related Inventory of Goods at all these stores, the Capital Employed number has not gone up much. Now look at the Yellow bar in the chart. The Capital Employed in the 'Others' segment has gone up sharply from about Rs.28,000 crores in June'13 to over Rs.60,000 crores by December'14. That means a massive amount of about Rs.32,000 crores has been Invested in these businesses. As per information available & my estimates, about Rs.4000 crores of this has gone into acquiring majority stake in Network 18 business and most of the remaining Capital has gone into acquisition of spectrum in 1800 MHz band, laying of Optical Fibre Cable Network and setting up of 4G Wireless network on tens of thousands of towers. As per reports, RelJio will be using over 1,00,000 existing towers from companies like Bharti Infratel, Reliance Communications, VIOM, etc. to set up it's 4G-LTE network. I think the CAPEX in this business will continue at a rate of about Rs.3,000 to 4,000 crores per quarter on an average, atleast for another 4 to 6 quarters as the company keeps expanding coverage of it's 4G services. It will be interesting to see how the revenues from this business build up once the services are commercially launched in the coming months. I have posted my guesstimates of potential revenues & it's impact on RIL's overall numbers in an earlier article.
But RIL has seen it's profit margins decline over the recent 3-4 years. In FY'11, RIL's consolidated EBIT margins were a little over 10%, while in FY'14 it had dropped to just over 7%. This was one example where the economies of scale theory did not work well. But a lot of it was because of substantial volatility in prices of products that RIL deals in, both on the raw material side as well as the end product side.
RIL has drawn a huge CAPEX plan for it's Refining & Petrochemicals businesses mainly aimed at improving efficiencies & ultimately improving margins. All these projects are expected to start showing impact on it's numbers from the second half of FY'16 and will be fully visible by FY'17. In December'14 quarter, RIL's EBIT margins in Petrochemicals business was almost 9%, the best figure in over 2 years, while that for Refining business was 4%, substantially lower than the best number it has seen in last 2 years. The new CAPEX plan is expected to boost it's EBIT margins by atleast 1.5% to 2%.
Enough of discussing RIL's primary businesses. Now let's completely focus on RIL's newer businesses, which it has entered and scaling up over the last few years. These business segments are: Oil & Gas production, Modern Retail and then the 'Others' segment, which comprises of Textile, Media, Broadband & other investments in Associate companies. In the June'13 quarter, these 3 business segments contributed Rs.7763 in Revenues & Rs.674 crores in EBIT. In December'14 quarter, i.e. in 6 quarters from then, the total contribution to Revenues jumped to Rs. 10,974 crores and Rs.1213 crores in EBIT, a jump of 41% and 80% respectively in just one & half years.
Out of the Total Revenues & EBIT from the 3 business segments, the Oil & Gas business alone contributed about 26% of the Revenues & 68% of EBIT in December'14 quarter. This is despite the fact that the Oil & Gas business suffered a huge drop in Crude Prices during the December'14 quarter. RIL's investments in Shale assets in US are paying healthy dividends currently. The Oil & Gas assets in India are not doing so well with flat to negative growth in production numbers in most assets. The revenues & profits from Oil & Gas business would have been much higher in December'14 quarter if Crude prices had not collapsed so much. Crude prices tumbled from $110 per barrel levels to $45 per barrel during that quarter. Since January'15, the crude prices have improved and are now hovering around the $55 to $60 levels. This business enjoyed EBIT margins of about 29% at a time when the prices were tumbling fast. So we can safely assume that profits will be decent even when Crude prices hover in the $50 to $70 per barrel range.
RIL's Retail business has continued to post healthy Q-o-Q & Y-o-Y growth over the last 3 quarters. The company has got aggressive on it's Retail footprint expansion & marketing. Even consumers seem to be shopping more in the recent months. And the best news is that RIL's Retail business has seen improving profitability in the last 3 quarters. From an EBIT of Rs.24 crores on a Turnover of Rs.3653 crores in March'14 quarter, the business has seen an EBIT of Rs.133 crores on a Turnover of Rs.4686 crores in December'14 quarter. With the Indian economy picking up pace, Inflation going down, we can expect the overall consumption demand to continue growing in the coming quarters & years. Apart from Retail stores, RIL will start e-Retail in a big way sooner or later. It has already started testing it via www.RelianceFreshDirect.com where consumers in Mumbai can make online purchases of Grocery & other Daily need items. With a vast nationwide presence, RIL can easily spread this business in many more cities over the next 1-2 years. There is immense scope for growth in almost all of RIL's Retail formats, once they get integrated with an e-commerce platform. Going by the recent growth rates, this business is expected to cross the Rs.20,000 crores in Annual Revenues mark before December'15.
Coming to the other businesses, I don't have the exact details of the performance of RIL's Textile business or investments in other Associate companies, which have been counted in the 'Others' segment. But it is more important to see 2 other important parts of this segment, i.e. Media & Telecom. We all know RIL is preparing for a mega launch of it's 4G-based telecom services, with a big push towards offering high-speed Internet services across 5000 cities & towns and lakhs of villages across the country. In order to be able to offer other complimentary services, RIL acquired majority stake in Network 18 Media & Investments Ltd. in June'2014. With this acquisition RIL is now the owner of a host of digital properties & TV Channels. Some of the popular constituents are TV Channels like Colors, CNBC TV18, CNN-IBN, IBN7, CNBC Awaaz & digital properties like HomeShop18.com, BookMyShow.com, Moneycontrol.com, etc. Revenues from this business probably started getting consolidated into RIL's 'Others' segment from Sept'14 quarter, i.e. Q2. This business reported revenues of about Rs.745 crores in Q2 and Rs.830 crores in Q3. So the jump we see in revenues of this 'Others' segment from Rs.1700 crores level to about Rs.2500 crores level in Sept'14 quarter is because of addition of Network 18 revenues.
The interesting part is that the 'Others' segment saw another big jump in revenues in December'14 quarter to over Rs.3400 crores level. I am speculating that this jump is because of RIL's Telecom & Broadband business. We have read that RIL has already done soft launch of it's Jionet WiFi services in nearly a dozen large cities, mostly in busy business areas of those cities. Each user logging on to Jionet WiFi service during this soft launch period is entitled to receive initial Free Usage limit, after which they will have to pay for usage. Reliance Jio Infocom (RelJio) had launched it's WiFi service in some parts of Ahmedabad, Surat & Baroda about a year ago. Apart from that there have been reports that RelJio has softlaunched it's WiFi service under the Jionet brand in several cities like Indore, Bhopal, Varanasi, Kolkata, etc. Apart from these WiFi Hotspots, RelJio has been showcasing it's WiFi service at several popular Trade Fairs and large College Festivals. There was one recent report which said that the Average Data Usage per customer at it's WiFi Hotspots is over 100 MB per day. Another report said that RelJio has applied to BEST in Mumbai for usage of it's Street Light poles to install it's WiFi equipment, which will enable the company to launch it's WiFi service over a much larger coverage area. I am sure RelJio will be using many such innovative techniques to ensure maximum WiFi coverage so that it's service becomes the primary medium of Internet access for maximum number of people. Reports suggest that the Commercial launch of RelJio's 4G and WiFi service should happen in April'2015.
The above chart shows the Capital Employed at the end of each quarter in each of the 3 business segments of RIL which I have discussed in this report. The Capital Employed in the Oil & Gas business has gone up from about Rs.53,000 crores in June'13 to about Rs.70,000 crores in December'14, majority of this extra Capital has gone into the company's Shale assets in US & Canada. These investments will reflect in substantial revenue additions in the coming quarters, provided the Crude prices remain above $50 or $55 per barrel level. The Retail business has negligible Capital Employed at around the Rs.6000 crores level, which suggests that the business is being run in a very Capital efficient manner. Despite strong growth in the number of stores and the stocking up of related Inventory of Goods at all these stores, the Capital Employed number has not gone up much. Now look at the Yellow bar in the chart. The Capital Employed in the 'Others' segment has gone up sharply from about Rs.28,000 crores in June'13 to over Rs.60,000 crores by December'14. That means a massive amount of about Rs.32,000 crores has been Invested in these businesses. As per information available & my estimates, about Rs.4000 crores of this has gone into acquiring majority stake in Network 18 business and most of the remaining Capital has gone into acquisition of spectrum in 1800 MHz band, laying of Optical Fibre Cable Network and setting up of 4G Wireless network on tens of thousands of towers. As per reports, RelJio will be using over 1,00,000 existing towers from companies like Bharti Infratel, Reliance Communications, VIOM, etc. to set up it's 4G-LTE network. I think the CAPEX in this business will continue at a rate of about Rs.3,000 to 4,000 crores per quarter on an average, atleast for another 4 to 6 quarters as the company keeps expanding coverage of it's 4G services. It will be interesting to see how the revenues from this business build up once the services are commercially launched in the coming months. I have posted my guesstimates of potential revenues & it's impact on RIL's overall numbers in an earlier article.
Happy Investing!!!
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