In a quarterly video conference with executives in 2012, Reliance Industries (RIL) Chairman Mukesh Ambani started with a warning - "What has brought us here will not take us to the future." He was concerned that Reliance's mainstay business of crude oil refining and petrochemicals could lose sheen amid push for renewable energy, electric mobility and growing global trade tensions.
So what should RIL do? About a year back, in 2011, Ambani's daughter Isha had sowed the seed of a new business, though. Home from Yale University for a holiday, Isha decried poor broadband speeds in India. Until then, even though Ambani had already planned entering telecom by acquiring Infotel Broadband Ltd in 2010, his mind hadn't quite zeroed in on the huge digital and telecom opportunity due to pent-up demand. Isha's statements connected the dots.
Ambani concluded 'Data is the New Oil'. Thus began the relentless transformation of RIL that continues till date. The company took four years to build the digital infrastructure to launch Reliance Jio in September 2016. Today, it's the country's largest network with 387 million 4G subscribers. It was in the process of building Jio that Ambani understood how modern retail is intertwined with technology, a realisation that generated an idea to build India's very own Amazon/Alibaba around Reliance Retail.
In the next five years, while Reliance Retail quadrupled its footprint from 2,621 stores to 11,784 stores, it also created an ideal launchpad for an ambitious e-commerce platform, Jio Mart, launched in 200 cities on May 23.
Thanks to the thrust on these consumer businesses, the company, which was primarily an oil and gas and petrochemicals player, generated 35.1 per cent of its cash flows from consumer businesses in FY20. RIL's revenue and profit jumped 70 per cent to Rs 6.59 lakh crore and Rs 39,880 crore, respectively, in this period.
Veteran investment banker Hemendra Kothari, a family friend of the Ambanis since Dhirubhai's time, recalls his chat with Mukesh five years ago. The billionaire spoke about progression in digital evolution, future software offerings and business opportunities. "He is a dreamer and foresees changes in human life and society much before time. He is capable of converting dreams into reality," says Kothari.
So, what is this transformation all about?
Petrochemicals and refining have been RIL's core for decades (contributing close to 90 per cent cash flows). This is changing. Consumer businesses now account for more than one-third cash flows. Ambani now calls RIL a technology company. But the larger objective behind the transformation is: build three strong pillars of global scale in refining & petrochemicals, digital & telecom, and retail; untangle their financial inter-dependence; and create debt-free balance sheets. And, perhaps, slowly hand over businesses to the next generation.
His twin children, Isha and Akash, joined Reliance Jio and Reliance Retail boards in 2014. People in the know say Ambani gave just four days break to elder son Akash after his graduation to join the company. The youngest son, Anant, joined the Jio Platforms Ltd (JPL) board a little late, in March. Isha and Akash work out of the corporate office in Navi Mumbai's Reliance Corporate Park. Akash heads strategy and leads acquisitions along with Isha, who is part of branding and marketing. The twins were practically living out of private jets - Ambani owns Boeing Business Jet 2, Airbus A319, among others - early this year as they led negotiations with Facebook and others in the US for investing in JPL.
Those investments were critical to retire mounting debt. RIL invested Rs 6 lakh crore in the last six years in its three business streams. Nearly Rs 4 lakh crore of this went to digital and telecom businesses. This burdened the company with gross debt of Rs 3.36 lakh crore (as on March 31, 2020) and doubled net debt to Rs 1.61 lakh crore. However, the entry of Facebook and six other investors in JPL for aggregate investment worth Rs 97,885 crore for 21.06 per cent stake has alleviated those debt concerns. The deals valued JPL at Rs 4.9 lakh crore. The transfer of Rs 70,000 crore debt to two infrastructure investment trusts in tower and optical fibre, pending capital expenditure payments of Rs 50,000 crore and spectrum fee of Rs 20,000 crore are not included in the gross debt number.
Harsh Goenka, Chairman, RPG Enterprises, says Ambani is a combination of exceptional vision, matchless ambition, unwavering commitment and outstanding execution. Even as coronavorus sent shock waves in economies and industries worldwide, Ambani was striking one deal after another. In one and a half months, JPL has signed deals with private equity investors Silver Lake Partners, Vista Equity Partners, General Atlantic, KKR, Abu Dhabi sovereign fund Mubadala and Abu Dhabi Investment Authority (ADIA). RIL also launched India's largest rights issue of Rs 53,125 crore in May-June, which was subscribed 1.59 times. By end of June, 25 per cent of the issue proceeds, or Rs 13,300 crore, will be realised. The rest will flow in 2021.
At a time when share prices of most companies are under pressure, RIL has risen 80 per cent since the crash of March 23. Market capitalisation has topped Rs 10 lakh crore, for the second time ever.
Ambani's deal-making spree hasn't ended, though. He is working on sale of 49 per cent stake in Jio-BP fuel retailing business to British oil giant BP plc for Rs 7,000 crore. The deal could be concluded in the June quarter itself. These deals and the rights issue will reduce RIL's net debt by Rs 1 lakh crore. Ambani's plan to make RIL debt-free will be achieved three months before the target (by December 2020). More deals are in the offing. These include 20 per cent stake sale in Reliance O2C, the newly-formed subsidiary, to the world's most profitable company, Saudi Aramco, for Rs 1.14 lakh crore.
Unlocking Interdependence
The group has now been restructered for strategic investments. In the new structure, RIL will be the holding company like Tata Sons. Under it, there will be four major subsidiaries - Reliance O2C Ltd (R02C), JPL, Reliance Retail Ventures Ltd (RRVL) and Network 18 Media and Investments Ltd.
The refining and petrochemicals businesses come under RO2C and JPL is the holding company for Reliance Jio Infocomm as well as digital businesses such as applications MyJio, JioTV, JioCinema, JioNews, JioSaavn and content-generation ventures. Grocery, lifestyle and fashion, digital and e-commerce business JioMart have been housed under RRVL.
The aim of forming these holding companies under the parent is to bring strategic investments in each and later unlocking value by offering shares, either in India or abroad. For instance, the unlocking the JPL that is under way will allow RIL to pay off a major portion of debt. To make JPL attractive for investors, RIL had last year injected Rs 1.08 lakh crore in return for optionally convertible preference shares (OCPS) and made it debt-free. This has enabled JPL to bargain for a higher valuation with Facebook and private equity companies. In oil and gas, the Aramco deal will multiply the value of RO2C, as it has huge cash flows with limited liabilities. RRVL will also see strategic investments soon.
However, the new structure means the entities will have to generate own capital, besides servicing debt from own cash flows, as they will have separate governance structures with different investors.
RIL subsidiaries have been doing inter-commercial deals all along. The petrochemical business was buying refined crude oil from refineries and Jio was buying mobile phones for subscribers from Reliance Digital. Almost 43 per cent of Reliance Retail's revenue comes from connectivity business (billing and sim card sales for Jio) and retailing of fuels. This will change if new investors in RRVL seek commercial terms for inter-subsidiary businesses at standard market margins, say experts.
RIL has been using cash flow from the petroleum business to build telecom and retail subsidiaries as well as acquire shale gas assets in the US, apart from media companies. RIL has spent about Rs 4 lakh crore to build Jio and about Rs 1 lakh crore for expanding the petrochemicals business in the last five years. This will change too. "In the new structure, all companies are expected to be independent entities under a holding company. They will have separate balance sheets and governance structures. The liability of one company will not affect the other. They cannot utilise each other's cash flows. The investor will have the freedom to choose the sector rather than investing in a bouquet of companies," says an expert.
Dance to Digital
Three years ago, Ambani went past the government's retirement age of 60 years. It was at this stage that he drew up the plan to build a software company inside RIL which can provide e-commerce, cloud storage, entertainment, home automation and high speed broadband services for businesses. JPL is developing projects around Internet of Things, Blockchain, big data, artificial intelligence, machine learning, robotics and drones. The ecosystem will be supported by cloud, edge and super-computing.
People who work closely with Ambani say he is a transformed man, focusing on thought leadership, while leaving execution to the team led by Manoj Modi, the Meswani brothers (Nikhil and Hital), Executive Director P.M.S. Prasad, CFO Alok Agarwal, and children Isha and Akash.
A reluctant public speaker, he has been appearing at leadership summits of other firms - recently at summits of Mahindra & Mahindra and Microsoft - speaking on national interest, humanity and how technology changes life.
Shekhar Bajaj, Chairman and Managing Director of Bajaj Electricals, calls Ambani an execution specialist. "Ambani plans projects on a huge scale such as Walmart, Microsoft and Google. RIL has deep pockets to convert business plans into success," adds Bajaj. It is this ambition, risk-taking and desire to build global scale that makes analysts compare him with Jack Welch, former CEO of General Electric (GE). Welch expanded GE from a $12 billion revenue company to an engineering conglomerate with $410 billion revenue during his 20-year stint as CEO. The key for Welch was diversification and growth, while in Ambani's grand scheme of things, digital and retail businesses are interlinked, and can drive growth for years to come. By creating the nationwide broadband and wireless infrastructure, he has built the highways. Now, he has to build businesses along these highways with online service offerings. The third step will be local manufacturing of products. For instance, if Jio Mart is the shopping complex on the digital highway, the products will be grocery, electronics and apparel of Reliance Retail. Selling products to retailers and customers will be the next step. Shopkeepers, largely kiranas, will be provided software and financial credit to connect with customers and wholesale merchants. Customers will get advantages of credit and crypto currency too. Serial entrepreneur Ronnie Screwvala says, "Most of us get confused and waylaid thinking that while building a global scale business, you can't do it for your local market first. RIL and Mukesh have shown the way on that, time and again."
The Facebook Deal
The most striking of the six investments in JPL was Facebooks acquisition of 9.99 per cent equity for Rs 43,574 crore. In the absence of details from either side, it has caused a lot of curiosity and speculation regarding the long-term plan. The most obvious being that Jio can tap WhatsApp's 350 million users in India while Facebook will be able to enhance its base among the 387 million Jio subscribers and even sell them financial products, including crypto currency Libra. Kothari says Jio is not just an online shopping and telecom company. "It will touch various aspects of human life in coming years."
The back-to-back deals will help JPL become independent with surplus capital. JPL will use Rs 28,000 crore from the Facebook deal to redeem OCPS of parent RIL and retain Rs 15,000 crore on its books. JPL, which has a debt of around Rs 23,000 crore, may also consider listing in the US market where tech companies get exponential valuations, say company sources.
In FY20, Jio posted a 87.65 per cent rise in standalone net profit to Rs 5,562 crore, as against Rs 2,964 crore in FY19, driven by subscriber additions and tariff increase in the third quarter. Morgan Stanley analysts say Jio's subscriber additions picked up in January as Airtel maintained its run rate and Vodafone Idea's base declined. "Jio held about 58 per cent of the wireless data subscriber market share as of January 2020, followed by Airtel at 22 per cent and Vodafone at 18 per cent," they add.
At launch, Jio offered free lifetime voice calls and free data for three months. The offer was extended. This decimated the telecom industry. Vodafone and Idea merged. Tata Teleservices shut shop and Anil Ambani's Reliance Communications filed for bankruptcy. Norway's Telenor sold its Indian operations to Bharti Airtel. Russia's Sistema also exited the market.
Does this mean smooth sailing for Jio? The chief architect of Indias data privacy law, Justice B.N. Srikrishna, has raised a red flag over lack of a data regulator to oversee privacy concerns related to the Reliance Jio-Facebook deal. "It is a strategic investment. A strategic investment means it is an investment intended to further the business interest of the investee as well as the investor."
Both firms say they will not share data. But critics say some sharing will happen naturally when they work together. The deal may invite new social media regulations. In that case, Ambani will be able to play a guardian angel for Facebook in India.
Jio's rivals allege it has got undue advantages from the telecom regulator. The wireless spectrum that Infotel Broadband bought never had a licence for voice. It also got an extended field trial period which was objected to by rivals. In this period, it allegedly grabbed customers from rivals by offering free data.
India's Own Alibaba
Mukesh Ambani's retail universe is often compared with Jack Ma's Alibaba multi-channel ecosystem. Apart from e-commerce and physical retail, Alibaba has its own version of Facebook, Messenger, YouTube and WhatsApp. It also has a film production arm. Ant Financial, which owns Alibabas escrow service, AliPay, valued at $150 billion, is among the world's highest valued companies.
When the coronavirus pandemic brought retail business to a standstill, even a strong physical retailer such as DMart experienced a 45 per cent dip in sales in Q4FY20. Reliance Retail saw an opportunity and launched its e-commerce grocery platform, JioMart, with 50,000 SKUs. It has been rolled out across 200 towns to capitalise on the surge in online shopping across the country. The initial feedback is far from encouraging, though. Social media is abuzz with complaints about quality standards and delivery efficiency. This is hardly an indication of things to come. "Reliance's greatest advantage is financial capacity to sustain, which allows it to go wrong and then correct itself," says Ashok Maheshwari, who was part of the founding team of DMart.
Reliance's game plan is to create a consumer ecosystem through its 'new commerce' initiative. This involves creating a super app, which will offer data and telephony and enable users to shop online across Reliance's retail formats and consume entertainment. Consumers will be encouraged to pay through JioMoney, which is expected to expand into financial services. In order to strengthen this digital ecosystem, it has bought technology companies that offer solutions in artificial intelligence (Haptik for Rs 700 crore), voice recognition (Reverie for Rs 150 crore) and virtual reality (Tesseract for Rs 10 crore).
It also owns a host of entertainment businesses such as Viacom 18, Balaji Telefilms, Eros and Saavn and so can sell its entertainment offerings on JioTV and JioMovies, available on JioApp. In fact, Facebook's second agreement - the commercial partnership agreement between JPL, Reliance Retail and WhatsApp - is expected to give further impetus to this new commerce initiative. The synergies give Reliance Retail a clear advantage over peers such as DMart or Future Retail and global biggies such as Amazon and Walmart (Flipkart), which are not allowed to have physical presence in India.
Retail Presence
Jio Mart will piggy ride Reliance Retail, the country's biggest retail network with 11,784 stores (Reliance Digital, Reliance Trends, Reliance Smart, Reliance Fresh and Reliance Mart) in 6,700 towns and cities. While JioMart is the new kid on the block, its other ecommerce businesses such as Ajio (fashion) and Reliancedigital.in have also started contributing substantial revenue. Reliance is the first Indian retailer to be in the top 50 on Deloitte's Global Powers of Retailing 2020 Index, which ranks 250 retail firms on their revenue. It was 94th last year. "If you take the entire Reliance Retail ecosystem, including JioMart, you really can't say they are competing with one individual company. They are going after consumers' wallet share. Their business is multi-channel, including cash and carry," says Arvind Singhal, Chairman, Technopak Advisors.
A significant part of Reliance Retail's multi-channel strategy involves partnering with local grocery stores. It plans to have an ecosystem of over five million kirana stores as last-mile delivery points. The idea is to penetrate the unorganised retail market (90 per cent of the retail market) by helping them digitise through mobile PoS (MPoS) devices. This will enable better inventory management for kiranas and also help them take orders online.
However, the challenge here is that a large chunk of kirana store owners don't want to use the Reliance Mpos fearing they will be forced to order from Reliance in place of the traditional distributor they have been dealing with for years. "They have given PoS devices for free but kiranas don't trust Reliance as they are competing with them in the B2C space," says the CEO of a leading retail company. "A kirana may adapt to Reliance, but if he is forced to buy from Reliance, he may exit. Kirana store owners are smart businessmen. It won't be easy to dictate terms to them," says DMarts Maheshwari.
RRVL, the holding company of all retail businesses, plans to go for a public issue, besides bringing in a strategic investor. "RRVL will get listed. The operating companies, Reliance Retail and JioMart, will be part of it," says Dinesh Thapar, Group CFO, Reliance Retail.
Reliance Retail has been growing using RIL's cash flows. Its growth has been exponential after the launch of Jio, whose connectivity revenue (billing and SIM card sales) contributed 34 per cent to revenue and 13 per cent to EBITDA in FY20. Petro retailing added 9 per cent to revenues and 2 per cent to EBITDA.
Grocery, fashion and lifestyle are success stories in Reliance Retail. If you take out petroleum and Jio, physical retail was around Rs 95,000 crore in FY20. Dmart's Rs 24,870 crore (FY20) and Future Retail Rs 20,165 (FY19) crore revenues were way behind.
Reliance's platform strength, cash and carry arm, physical retail businesses and partnership with kirana retailers give it a huge multiplier effect but the $800 billion Indian retail market has room for multiple players. Retail experts say if there is anyone who has the financial might to give Reliance a run for its money in the platform business, it is Jeff Bezos-owned Amazon. The American ecommerce giant is known to be in talks with Bharti Airtel for a 5 per cent stake. If this happens, Amazon will emerge a formidable competitor with a combination identical to Jio-Jio Mart.
However, the Indian retail market has seen more misses than hits. Indian retail's poster boy, Kishore Biyani, is staring at bankruptcy because of debt. Biyani was in a similar situation in 2012 when he was forced to sell his most profitable venture, Pantaloons, to Aditya Birla Retail. In 2015, Bharti Airtel exited its loss-making joint venture with Walmart and eventually sold its grocery retail business, EasyDay, to Future Retail. In 2018, Aditya Birla Retail sold its unprofitable grocery retail business, More, to Samara Capital and Amazon. Last year, the Godrej Group ended its tryst with retail by selling its premium grocery retail business, Natures Basket, to Spencers Retail. The only retail success story has been stock-market tycoon Radhakrishna Damanis Rs 24,870 crore DMart, which has emerged as the most valuable retail business in India. Its retail arm Avenue Supermarts Ltd is valued Rs 1.6 lakh crore in the stock market.
Some analysts allege the retail FDI policy has been framed in such a way that it suits RIL. It doesn't allow FDI in multi-brand retail, which means the likes of Amazon and Walmart cant have physical presence in India. Walmart tried to fulfill its B2C aspiration by acquiring Flipkart in 2018 for an astronomical $16 billion, but its wings have been clipped, as it is allowed only to function as a marketplace. Both Amazon and Walmart are not allowed to sell their own brands legally, except in categories such as food. This gives Reliance an upper hand, as it can push private brands, which account for 90 per cent of all merchandise offerings in categories such as apparel and jewellery.
Recharging Petrochem
Anticipating demand destruction in crude oil refining, Ambani had de-cided to invest Rs 1 lakh crore in expanding the petrochemicals business four years ago. In mid-May, after two months of lockdown, RIL exported a shipload of petrochemical products to China for the first time. The ship Sana of Maersk sailed with 2,611 containers of 68,000 tonnes from Jamnagar. It was possible only because of transformational projects in petrochemicals, says an RIL executive.
Harsh Goenka says Ambani has successfully pivoted RIL from an oil and petrochemical giant to a retail and technology organisation. "It requires extreme courage and determined mi-nd to put the world in the palm of your hand," Goenka says, referring to Reliance India Mobile's 2002 advertisement, kar lo duniya mutthi mein.
The shift to consumer businesses started with gross refining margins (GRMs) - the margin earned for turning every barrel of crude oil into fuel - in petroleum falling three years ago, and pricing instability in the hydrocarbon business. There was also uncertainty in oil supply due to heightened geopolitical tensions in West Asia and sanctions on Iran. The crisis escalated in March 2020, when crude prices crashed to record lows. In FY20, RIL's GRMs fell to $8.9 a barrel from $9.2 in FY19. However, according to research analysts at Bernstein, these are still higher than the Singapore benchmark GRM at $7.7 a barrel. However, with the lockdown still in place and crude oil storage nearly full, the current quarter may be much more challenging, they say.
While refining was stronger than expected, petrochemicals faced pressure on margins due to contracting GDP growth and declining demand. The earnings before interest and tax (EBIT) margins for the petrochemicals business fell for the fourth consecutive quarter to $67 a tonne during Q4FY20, the lowest since 2016.
"The outlook on margins is challenging given start of new units in China and weak demand for chemicals. However, a strong recovery from the virus could see margins rise," says an analyst.
The petrochemicals business had surpassed the EBIT of the refining business in FY19. But revenue from petrochemicals decreased 15.6 per cent to Rs 145,264 crore in FY20 due to lower price realisations and weaker demand in well-supplied markets. The EBIT for the petrochemicals segment was Rs 25,547 crore, down 21.1 per cent compared to the previous year, due to lower margins in key products. However, Ambani is bullish on petrochemicals. He has prepared a blueprint for its oil-to-chemical (O2C) play as negotiations progress with Saudi Aramco. He had, in fact, discussed his plans with the Crown Prince of Saudi Arabia, Mohammed bin Salman, in February 2019, when the de-facto leader was visiting India.
RIL wants to convert 70 per cent of its output from the Jamnagar refinery and petrochemical complex to chemicals. At present, the complex produces 90 per cent fuels - primarily petrol, diesel, naphtha, kerosene and liquefied petroleum gas - and 10 per cent chemicals.
Convinced by Ambani's concept, Saudi Aramco has expressed its desire to be a strategic partner. The deal includes stake in material assets such as the two refineries and a petrochemical complex in Jamnagar, besides stake in fuel retailing. "As the world migrates from fossil fuels to renewable energy, we will maximise O2C conversion and upgrade fuels to high-value petrochemicals. This will be done in a phased manner over the next decade to meet the rapidly increasing demand for petrochemicals, in India and the region," Ambani said in the company's last annual report.
The O2C strategy involves new ways to upgrade the refinery intermediate streams by value, according to company officials. "Furthermore, RIL has developed a disruptive technology, a multizone catalytic cracking process, which converts a wide range of feedstock to high-value propylene and ethylene," they add.
The Jamnagar complex has also commissioned the worlds first fully-integrated refinery off-gas cracker and petcoke gasifiers. Aramco will supply 500,000 barrels of crude oil every day to RILs Jamnagar refinery (28 per cent of its requirement) on a long-term basis. Ambani is focussing on converting RILs O2C business into one of the top five petrochemicals companies in the world.
Struggling Segments
The turnaround of hydrocarbon exploration & production (E&P) and media is a pain point. The RIL-led consortium has committed nearly Rs 80,000 crore in the KG Basin - Rs 45,000 crore 10 years ago and Rs 35,000 crore (this is continuing) for three fields.
The E&P business has also been making losses for the last four financial years. RIL roped in BP in 2011, selling 30 per cent stake for $7.2 billion, to revive the business. It helped it cut losses, but BP had to write-off a part of its investments.
The Bernstein report says E&P remains weak as domestic gas volumes continue to decline. Production in US shale operations increased 14.4 per cent during quarter ended March, but due to low gas prices in the US, profitability remains low.
"While production remains on a downward trend, the KG-D6 project is on track to deliver significant production growth," according to the report. The project will on stream more than three trillion cubic feet of gas. RIL has been in talks with overseas funds to sell stake in optical fibre InvIT to further reduce debt. Sources say it is also in talks with Microsoft for another deal in JPL. The IPOs are not Ambani's immediate priority.
RIL is also scouting for buyers for some of RILs real estate assets (might include land RIL bought for special economic zones in Mumbai), and some financial investments. Ambani said in the last AGM that RIL is "de-emphasising" its shale gas business in the US and will focus only on India. RIL may eventually consider selling the shale gas business.
Ambani doesn't want a bad apple in the basket. Ronnie Screwvala says the assumption is that if you have access to unlimited capital, you can think big, but most lose their way when it comes to executing ideas. Perhaps Mukesh Ambani is different.
(With inputs from Ajita Shashidhar)
@nevinjl