How investments in tech are helping Asia's richest man diversify his business
For decades, Mukesh Ambani’s empire has been supported by the energy flank he inherited from his father.
However when Mr Ambani faces shareholders at Reliance Industries' total annual meeting on Wednesday, he’ll be speaking with respect to an empire that is increasingly breaking free from oil-price fortunes. The billionaire’s string of deals with Facebook and other Silicon Valley players this season have propelled Reliance in to the e-commerce and technology space like never before.
The stock has a lot more than doubled since a low in March to an archive as Jio Platforms, Reliance’s digital services business unit, netted almost $16 billion (Dh58.8bn) in a fundraising blitz. All of this at a time when sentiment in the oil market remains fragile even after prices have recovered from a two-decade low.
Business-to-consumer sectors like retail and digital are more resilient to monetary shocks
Harsh Dole, India Infoline Finance
The flurry of deals for Jio have backed Mr Ambani’s ambition to morph Reliance from a power company to an e-commerce giant. They’ve also reduced oil’s influence on the company’s stock price. The company’s shares have a beta of 0.14 with Brent crude now, meaning a 1 % weekly drop in oil causes only 0.14 % fall in Reliance. This factor was as high as 0.7 during the 2008 meltdown, data published by Bloomberg shows.
Jio reaches the centre of Ambani’s drive to make a homegrown version of Alibaba Group. The tie-up with Facebook has given the venture a Silicon Valley stamp of approval and has lured a dozen investors, enthused by the unit’s potential to shake up online retail, content streaming, digital payments, education and health care in a market of just one 1.3 billion people.
“Business-to-consumer sectors like retail and digital are more resilient to financial shocks,” said Harsh Dole, an analyst at India Infoline Finance. “These sectors fetch a premium return for valuation. The stock has been a beneficiary of that, without doubt.”
Facebook, which paid $5.7bn for about 10 % of Jio Platforms, has said it expects the tie-up can make WhatsApp the primary way an incredible number of India’s small businesses hook up with customers. The messaging software has roughly 400 million users in the country, a comparable as Reliance Jio Infocomm’s subscriber base for wireless services.
All told, the sale of 25.2 % of Jio along with a $7bn rights issue to Reliance shareholders allowed Mr Ambani to declare his flagship free of net debt sooner than the March 2021 target. Last week, BP paid $1bn for a 49 per cent stake in the company’s fuel retail business, completing a deal announced in 2019. Reliance said it had net debt of 1 1.6 trillion rupees (Dh77.9bn) as of March.
The diversification has begun to trim the company’s reliance on the cyclical energy-related businesses. Petrochemicals and refining, which made up the vast majority of Reliance’s earnings in 2017, has since shrunk to 65 per cent. The contribution from digital and retail businesses has increased threefold during the period.
Not absolutely all analysts are sounding the all-clear for Reliance just yet.
On paper, Reliance is ‘net debt zero’ ahead of schedule. In reality, about 75 per cent of the rights issue funds comes into play next year. Macquarie Capital estimates the business still has about $16bn in net debt because of interest-bearing obligations - such as deferred spectrum charges and capex creditors - in addition to off-balance sheet debt under its tower and fibre investment trusts.
“We are cautious on the power of the company to create sustainable free cash flow due to major expenditures in the digital and retail businesses,” said Aditya Suresh, head of India research at Macquarie. He has an underperform recommendation on the stock.
As the relentless rally has left the stock’s 16 % tumble in March feeling such as a distant memory, the ascent may slow if the still-spreading pandemic prompts investors to pocket increases in size, according to Equinomics Research & Advisory.
The stock fell 0.2 per cent at 10am on Tuesday after a three-day rally, although price remains about 13 % higher than the common one-year target. For the present time, the optimism surrounding Reliance’s digital and telecom forays will probably support the premium.
“The marketplace is rewarding these necessary services,” Equinomics’ chief investment officer Chokkalingam G said.
Source: www.thenational.ae
