Mukesh Ambani group firms weighed down by capex

In the Mukesh Ambani group, most of the new forays such as retail, telecommunication and shale gas have been done through the flagship company, Reliance Industries (RIL).  RIL’s return on capital employed (RoCE), which has been declining since FY11, stood at 9.6 per cent in the previous financial year.
 
However, this low return has to be seen in the light of the huge capital expenditure (capex) plan the company has under way in Reliance Jio and petrochemicals. The success of its telecom venture, which has absorbed a large chunk of the company’s capital invested, will have a major impact on the capital efficiency. Analysts are more confident that the new capacities in the petrochemicals segment, which are expected over the next 12-15 months, will improve return ratios significantly.
 
Between FY05 and FY08, its RoCE averaged at about 18 per cent.  In the past 15 years, the group reported its highest returns on capital invested at 19.2 per cent in 2004-05, according to Capitaline data.
 
The group’s RoCE has been on a declining trend since FY11, the year the company started its major capital expenditure plan. Since then, its RoCE has fallen and stood at 9.47 per cent in 2014-15 before inching up in the past financial year.
 
“The decline is largely due to the company’s huge capital expenditure plan. Ideally, the returns should improve from here, but it would depend on how much they are able to deleverage and how much earnings contribution happens from petrochemicals because there is a delay in commissioning of new capacities. Jio will also continue to be an overhang,” said an oil and gas analyst who did not wish to be identified.
 
Part of the group’s large capital expenditure plan, is a $12 billion investment in petrochemical and refining business it started five years ago and another Rs 1.5 lakh crore in its telecom venture Reliance Jio. The company also looks to invest another Rs 1 lakh crore in its digital business in the next four years.
 
Analysts also point out the group’s diversification into other segments has not given handsome returns. The company’s foray into organised retail, for instance, so far has showed modest returns. For the past three financial years, the organised retail business clocked returns in single digit. The return on capital employed for business segments have been calculated as a ratio of the segment’s profit before tax to the total capital employed in that segment. Its latest foray into telecom, analysts say, is also expected to take a couple of years before it starts reporting profit for the group.