Top 20 club: RIL has mountains to climb

The firm would require it to more than triple its CAGR of revenue to 18.5% for the next decade from 6%

Mukesh Ambani’s ambitious target of getting Reliance Industries (RIL) into top 20 global companies would require it to more than triple its compounded annual growth rate (CAGR) of revenue to 18.5 per cent for the next decade from 6 per cent in the past 10 years.
 
An analysis of the sales target looks like a feat that is achievable if it were to take the inorganic route. “Organically it would be little difficult to maintain CAGR of 18.5 per cent for net sales for 10 years because the energy business is cyclical,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
 
Since a significant proportion of its revenue comes from oil refining, sale of fuel and petrochemicals, RIL’s revenue will spurt in times of high crude oil prices. It will also see its revenue shoot up if there is exponential growth in retail and telecom.  
 
RIL, with $45.5-billion revenue in 2016-17, is currently at the 271st position according to  Bloomberg’s data for sales of global biggies. While the list is topped by retailer WalMart with a turnover of $485.8 billion, 20th position is currently occupied by Anglo-Swiss trading and mining company Glencore PLC, with $152.9 billion annual sales. 
 

According to Bloomberg data, in the past 10 years, the top 20 companies have together clocked average 5 per cent CAGR for sales. Assuming the same growth rate, the 20th company could have an estimated $250-billion annual turnover in 10 years. “Inorganically RIL can achieve this target through diversification into value-added forward integration businesses of oil, gas and internet businesses,” Chokkalingam said.
 
For instance, RIL can get into fertiliser business that requires natural gas as fuel. Given RIL’s ambition to increase gas production this could be helpful. Also, though the firm is already into the petrochemical business based on oil derivatives, there is much more scope to expand businesses such as synthetic rubber to ride on increasing demand for automobiles.
 
Further, the company’s launch of wireless telecom service Reliance Jio in September 2016 has created a platform that can be used for multiple businesses, including mobility solutions.
 
In the first half of 2017-18, the digital services business that comes under Jio contributed 3.2 per cent of the Rs 2.3 trillion gross revenue. This is expected to have a big jump in terms of contribution to overall revenue of the company. “We also remain positive on the FTTH (fibre to the home) offering from Jio and expect the segment to represent 20 per cent of overall revenue in 5 years,” said Nikhil Bhandari, analyst with Goldman Sachs in his report.
 
The company's refining business is currently the biggest contributor to its revenue, with 58.7 per cent share in the first half. Petrochemicals and organised retail are two other big segments with 23 per cent and 11.3 per cent share, respectively.
 
But, this is set to change with petrochemical business expected to have a much larger share. On Tuesday, the company commissioned its refinery off-gas cracker (ROGC) complex of 1.5 million tonnes per annum (mtpa) capacity along with downstream plants and utilities. This marked the end of the $16 billion refining and petrochemicals expansion plan that RIL embarked on in 2014.
 
“Most investors were surprised by our conclusion that chemical will become the largest earnings contributor for RIL by FY19. We expect incremental Ebitda of $ 3 billion from the petchem segment in the next three years driven by higher volumes, favorable product exposure and improving cost structure,” said Bhandari of Goldman Sachs.
 
Goldman Sachs estimates RIL revenue to reach $75.4 billion in 2019-20, up from $45.5 billion in 2016-17. This is an estimated 17 per cent CAGR for revenue, provided the rupee-dollar exchange rate remains at the current level.