Although the energy/oil business is still the ‘bread & butter’ for Reliance Industries Ltd (NS:RELI), contributing almost 75% of overall group/consolidated core operating revenue and EBITDA, the next growth area is its digital business (JIO platform) and retail (both offline and online). Over the last few years, RIL is steadily diversifying from overdependence on fossil fuel/energy to consumer-facing business both in products & services.
Also, as a part of the oil to digital conglomerate, RIL may launch ride-hailing service (like Ola, Uber) in a different form. RIL may create its pool of vehicles and hire drivers with a synergy between its fuel pumps and JIO digital system. RIL is now aiming for the number one E-Commerce company in India using JIO ecosystems. JIO-Facebook JV will integrate WhatsApp between millions of Kirana (small) stores and JIO subscribers for an E-Commerce platform for the ‘common’ Indian public.
JIO will also develop a portfolio of technology solutions and apps for India’s MSMEs. Ambani said he plans to eventually expand the JIO/digital platform overseas: “The time has come for a truly global digital product and services company to emerge from India”.
For JIO, the next growth area may be fibre broadband with a minimum speed of 100 Mbps; JIO is offering speed up to 1000 Mbps (as claimed). Here, JIO’s competitor is not Bharti Airtel (NS:BRTI) or Vodafone-Idea, but various local/national cable operators (like Alliance Broadband in Kolkata), who supplies high-speed data through local cable TV operators to every corner of the locality (last mile reach) at an affordable price (generally unlimited data); i.e. consumers are getting both quality (high speed) and quantity (unlimited) at a reasonable price.
Earlier JIO was offering various BB packages under FUP (fair usage policy); i.e. there were certain data limits. This business model was largely unsuccessful because professional users/business houses need high-speed reliable unlimited data without worrying about data limit exhaustion. Now recently, after the COVID lockdown and WFH/digital theme, JIO has changed its marketing policy and made BB truly unlimited at reasonable prices, and in fact, big Cable operators like Alliance have also been forced to decrease their prices to match with JIO.
But the ground reality is that JIO has so-far failed to reach the last mile connectivity like a local cable operator. Although JIO is laying optical fiber almost all over major Indian cities/towns, to reach last-mile connectivity, it has to tie-up with local cable operators to use their already available cable network/infra. RIL has bought Hathway Cable (NS:HAWY), Den Network; but they are also not comparable with such local cable operators. There is also an issue of prompt local service for JIO BB.
In normal JIO (wireless) connectivity, the actual data speed varies from 2-15 Mbps on an average (normal SIM-WIFI JIO dongle). Recently, JIO wireless introduces a WFH data only package under FUP (like 30 GB high-speed data for 28-days with no daily limit for Rs.151). This is good for WFH and also for non-WFH as most of the home users are now using mobile as a replacement of TV, without worrying about daily data limit exhaustion.
And there is also a huge demand for higher data due to WFH, ZOOM meeting/video call/meeting, online classes, etc. Most of the COVID-related WFH maybe now converted into a permanent feature for higher productivity. And online classes will be there till 80% mass-vaccinations; i.e. at least till 2023-24. As a high-speed (min 100 Mbps) fiber BB is cost-effective for a family rather than an individual wireless package, the fiber BB will be the norm in the coming days even after COVID. So, it may be a huge growth area for JIO, if its business model/strategy is correct to counter local Cable BB. In India, the overall penetration of fiber BB is still at a very nascent stage.
The average speed of the JIO wireless (SIM) net was around 5-7 Mbps when it was first launched or under the testing phase around 2017. But now after 3-years, it seems that the bandwidth is clogged as JIO is now serving over 50% of India’s wireless data client and the average speed is now reduced to only 2-4 Mbps in a city like Kolkata. Such low speed is now almost at par with other telecom operators and occasionally their data speeds are now even better than JIO because their bandwidth is now relatively much lighter as maximum customers have shifted to JIO.
In JIO wireless, maximum ordinary customers generally recharge with the basic pack of (Rs.149-199), which offers an average speed of 2-4 Mbps and daily FUP at 1-1.5 GB data. Although it’s quite okay for small home users, it’s not sufficient for high-end BB/business users, who may keep the JIO wireless connection as an emergency backup, when there is any problem in their local cable BB connection.
Now apart from business, most households also have one such local cable BB connection with a router, so that every family member could share the high-speed BB in their systems at home (computers/mobile phones) to reduce the overall cost of data drastically. JIO has to capture this huge data market with an appropriate business model/plan as Indian consumers are now extremely price sensitive. And all these will take time for at least 1/2-years for JIO to show the result in its bottom line.
There are some controversies over JIO accounting policies as RIL may be keen to show the incubator and the world’s largest start-up as ‘profitable’ from day one. JIO has booked all the mobile handset subsidies (loss) through Reliance (NS:RELI) Retail for around Rs.0.0.072T. But all such accounting reconciliations (showing JIO as profitable at the expense of retail), was eventually adjusted in the consolidated P&L account of RIL.
And in any case, almost all of the operating metrics of JIO is better than its peers (Airtel, Vodafone-Idea) because of its sheer size and Ambani is also ready to burn more cash out of his oil & gas business until JIO has a significant size of the market, especially in fiber BB. Although, TV is still dominant, but being gradually and steadily being replaced by digital streaming services. Mobile is now also replacing traditional TV for a faster news source.
Telecom/data is now the future of digital India, but at the same time, it’s now a play for only big players, having a very deep pocket to burn cash until the competitor vanishes! RIL/Ambani is one such deep pocket player, able to show the door of bankruptcies to most of the erstwhile players (including his brother Anil Ambani-RCOM!). Now the only visible competitor for JIO is Bharti Airtel and it’s virtually a dual play. Vodafone-Idea is almost non-existent. But as the voice telecom market is saturating fast for JIO, the next growth driver is fiber BB and 5G.
Ambani is now trying to change RIL from an old-economy conglomerate into a tech and e-commerce titan by integrating the company’s e-commerce offerings with local small (mom & pop) shops across the country. RIL is also planning a nationwide 5G wireless network by H2-2021 (after the auction of required bandwidth) and a video-streaming platform that will bring Netflix (NASDAQ:NFLX), Disney+ Hotstar, Amazon (NASDAQ:AMZN) Prime Video, and dozens of other TV channels under one roof. RIL/JIO is also working with Google (NASDAQ:GOOGL) on a 5G enabled Android smartphone (below Rs.4K), part of the strategy to get common Indians to use affordable JIO mobile data for various services.
The M&A deal with Future Retail (NS:FURE) group is very important for Reliance to emerge as India’s ‘Wall-Mart’ with an ‘Amazon’ touch:
Overall, it’s now a ‘war’ between RIL (Ambani) and Amazon (Bezos) to grab the lucrative Indian online/offline market. Amazon and Flipkart together control over 80% of India’s $30B online market and RIL is expected to tap only around 1% in 2020. So, the opportunity for RIL is huge, considering the ‘Atmanirbhar’ (nationalist) sentiment among the Indian public. RIL (JIO MART) is now aggressively marketing its grocery/FMCG and vegetable items over its online platform. Looking ahead, online fashion (readymade garments) may be another area, where RIL can immediately challenge Amazon/Flipkart.
And to gain offline Indian retail market share, both RIL and Amazon are trying to buy out Future Retail (Big Bazar) quite aggressively. The stressed Future Group led by erstwhile ‘Retail King’ Biyani consists of various leading retail brands like supermarket chain Big Bazaar, upmarket food stores Foodhall, and bargain clothing chain Brand Factory. Like telecom, organized retail is now also a play of players having very deep pockets; i.e. able to sustain consistent cash burns (loss) for a few years.
Over the years, Future Enterprise Limited (FEL) has a gross debt of around Rs.0.12T. FEL is also a victim of COVID lockdowns. As per the deal, RIL will pay around Rs.0.25T for key FEL formats/brands like Big Bazar/FBB, Foodhall, Easyday, Nilgiris, Central, and Brand Factory, besides the logistics and warehousing business. RIL will take over certain borrowing and liabilities for Rs.0.19T, including the gross debt of Rs.0.12T for FEL.
After the passage of the deal with RIL, the FEL will have surplus cash of around Rs.0.035T in its book and will be left with the manufacturing & distribution of FMCG goods; integrated fashion sourcing & manufacturing business, and its insurance JVs with Generali (MI:GASI) along with other JVs with NTC Mills. RIL has also entered into a long-term agreement with FEL for sourcing branded fashion and FMCG products and already placing huge orders, supporting the FEL immensely, which is facing an acute cash crunch. However, FEL will have the freedom to sell their manufactured fashion & FMCG products to other retailers also.
Now the fate of the RIL-FEL deal may be decided ultimately by the Supreme Court of India. As a pointer, back in 2019, Amazon bought 49% in one of FEL’s unlisted firms (Future Coupons) for around $200M with the first right to buy into the listed flagship Future Retail after a few years. Amazon also owns 9.83% in listed Future Retails. As per Amazon, the deal with FEL has a clause that FEL can’t sell its retail assets to anyone on a ‘restricted entity/person’ list including RIL or Ambani, without its written approval. In other words, as per Amazon’s claim, FEL can’t sell its retail assets to any of its competitors unless Amazon rejected any such offer from FEL.
During COVID lockdowns, FEL reportedly suffered a revenue loss of around Rs.0.07T (Rs.7000 cr), resulting in an acute cash crunch. Even before the pandemic, FEL was in fragile conditions. In any way, during May’20, Amazon was considering buying out Future retail assets, but there were some alleged delays on the part of Amazon. And in the meantime, FEL made a deal with RIL, prompting Amazon to approach a Singapore arbitration court in Oct’20 to secure an interim stay for the deal between FEL and RIL.
Although the Delhi HC has said the fate of the FEL-RIL deal and Amazon legal tussle will be decided by proper regulatory and statutory authorities, this legal issue may be ultimately going to Indian SC accompanied by highly paid senior advocates from both sides. The FEL-RIL is playing the ‘nationalism’ card, accusing to crush an Indian retailer (FEL) by a global giant (Amazon)-like East India Co!
Amazon is insisting that the legal tussle is all-out Indian FDI policy and India’s willingness to enforce business contracts; if FEL is allowed to violate such contract, it’ll mean business/FDI contracts are not sacrosanct in India and investments in India are risky. This may cause India, a bad image after various flip-flops with Vodafone (LON:VOD), Cairn, etc, which may further affect Indian image as a business/FDI friendly country (especially amid growing cold war tensions with Chinese investors/FDI).
In any way, this is all about the fight between RIL (Ambani) and Amazon (Bezos) to control India’s $1T retail/consumer market. RIL is already India’s biggest offline retailer and if it’s able to acquire FEL’s retail, wholesale, logistics, and warehousing units, RIL may be able to control a significant share of the Indian offline retail market worth around Rs.0.70T. India is probably is the only country in the world with 1B+ consumers, still open for foreign firms without any local JV. As a competitor, Amazon is not ready to budge to RIL and thus both are in ‘war’ mode. Amazon has already pledged to invest an additional $6.5B for the Indian retail market and is also creating jobs for the country.
Amazon has also accused both RIL and FEL of insider trading because of the RIL deal. NSE has also issued notices to FEL for lack of timely & proper disclosures about the Amazon issues. On Friday (1st Jan’21), after the Indian market hours, SEBI has slapped fines on both RIL and Ambani for Rs.25M and Rs.15M for alleged insider trading in a 2007 case involving erstwhile RPL shares stake sale. RIL was also asked to surrender ‘unlawful gains’ for Rs.4470M from the F&O trading gain along with 12% annual interest. Although RIL will certainly approach SC for the issue, it may affect the market sentiment (RIL scrip), especially at a time, when Amazon is also accusing similar insider trading on both RIL and FEL.
Bottom line:
The FEL deal (Big Bazar) is important for RIL for inorganic expansion into the lucrative offline retail market. And it may be delayed considerably due to lingering legal tussles. But it’s not the ‘end of the day’ for RIL also as even if the deal does not materialize in the coming days, RIL can also expand organically by creating its own ‘Reliance Bazar’ format as ‘cash’ is also like ‘data & oil’ for Ambani; almost unlimited.
Techno-Funda View: RIL
Technically, whatever may be the narrative, RIL now has to sustain over 2020 for 2285-2375 zones; otherwise, it may correct again to 1800-1730 levels, which should offer a good demand zone for investors, considering the current bull market scenario and RIL’s prospect from oil to digital and retail.
P/L account analysis: RIL (standalone)
