A new Reliance

The focus on consumer-facing businesses has come at a cost

Reliance Industries Ltd (RIL) is going through an interesting transformation, with the new businesses of telecom and retail accounting for a quarter of the company’s consolidated revenue. If other businesses such as media are included, the energy business would be a little under 70 per cent. The numbers of the new businesses are not small — retail and Jio brought Rs 1.77 trillion in revenue in FY19. Jio caused a disruption in the telecom market and became the third-largest telco with 300 million subscribers at the end of March 2019. Five years ago, retail, despite being the country’s largest, was subsumed under “others”, and accounted for under 5 per cent of revenue, and telecom hadn’t even started. For the shareholder, it has been a profitable journey — the RIL stock is up 170 per cent since Jio’s launch in September 2016. RIL’s move stems from diversifying against the cyclical nature of the oil business and deploying the huge cash that the business generates in good times. The stock traded in a relatively narrow range for nearly a decade till 2017 barring a swing to a high and a low in 2008. Beyond the new capacities in refining and petchem, there was a need to deploy funds. But the diversifications into oil and gas exploration and shale gas, both related to its core business, were not yielding dividends, leading the company to focus on retail and telecom. RIL now has more aces up its sleeve as it seeks to integrate communication, content and commerce.

However, there are some warning signals. Success in the new businesses has come at a huge investment, with Jio taking up over Rs 3 trillion. Jio reported net profit in FY18, but that’s largely because of its depreciation policy, where it considers a longer life of an asset compared with its peers. It depreciates only the assets that are being used, which is a fraction of the total. Jio has access to low-cost debt and is capitalised way better than its peers, with a lot of help from its parent, RIL. If it were to follow the same accounting practices and had to bear a similar cost of capital as Bharti Airtel and Idea Cellular, it would not be profit-making, analysts say.

For Jio, RIL has made an attempt to deleverage the balance sheet, transferring its fibre and tower assets to two infrastructure investment trusts (InvITs) along with liabilities of Rs 1.07 trillion, but the benefits will accrue only after a new investor comes in. Though this has resulted in RIL’s net debt including capex creditors coming down from Rs 2.78 trillion in December 2018 to Rs 2.02 trillion, not many are impressed, and have termed the exercise as a mere “optical develeraging”. Jio will also have to pay lease rental for tower and fibre assets, which may offset the reduction in depreciation and interest cost. The other problem is that given no signs of a tariff increase, an improvement in Jio’s profitability is still some time away, while the business will continue to demand further investment, as will the integration of the new businesses. RIL thus has to look at some serious develeraging to keep the debt from piling up further. In that context, the reported move to sell as much as 25 per cent in the refining and petrochemicals business is prudent.