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BIG NEWS – Jul 21st 2017


Posted on 22-Jul-2017 Comments  0

RIL Grand Plan - I


Using cash cows to drive the value cows…



Nearly one year back when the idea of Reliance Jio was first announced,there was as much of skepticism as there was enthusiasm about the Jio launch. Most shareholders were not sure if the foray into telecom and the massive investments were really justified. At least, that is what had been the experience of the telecom companies in India. But that is exactly what RIL has continued to do, with good effect…


Churning the cash cows…


The entire idea of Jio was based on a simple logic. The company had to move from cash cows to value cows. Pet chem and refining were the true-blue cash cows for RIL. With an integrated value chain stretching from extraction and prospecting down to petrochemicals,RIL had the capacity and scale to maintain high GRMs. RIL surely delivered on that! Its average GRMs on a quarterly basis have been nearly 4-5 dollars above the Singapore benchmark. This has meant a huge cash chest for RIL. Additionally, the pet chem business was also operating at margins of 11-13% adding to the cash fuel. But neither oil refining nor pet chem could really build up to RIL valuations.Just a year back, despite its aggressive margins and consistent growth, RIL had a market cap of under $ 50 billion. The only answer to the riddle was to shift the business model more towards value cows instead of cash cows. That is exactly where Jio fitted in!


Planning 3 big shifts…


When RIL launched Jio, it was based on 3 major paradigm shifts. The first shift was that voice was becoming a commodity in the telecom offering and the way ahead was to price it like a commodity. Secondly, the company had to focus on the bottom of the pyramid by pushing in millions outside the smart phone universe into data consumption,since data was seen as the future of telephony. Lastly, like in the case of oil and pet chem, RIL realized that to be consistently profitable in the telecom business, they needed to own the entire value chain. That is exactly the direction that Jio is moving towards.


Putting cash to good use…


Over the last 1 year, Indian IT industry has been going through a dilemma.The question was how to effectively use the cash to add value to shareholders. Buybacks and special dividends have not worked and are unlikely to do so. What RIL did was to realize early on that the future to the valuation riddle lay in leveraging its cash cows by investing in a disruptive technology. It is into this complex algorithm of RIL that Jio fits in perfectly. Too much idle cash flow makes you look like a holding company. Shareholders do not like that.Investing these cash flows into disruptive and futuristic technologies is the answer. It is hardly surprising that Jio is now almost the RIL valuation driver! ©



RIL Grand Plan - II


Converging hardware, content and experience…



If one looks at the excitement around the RIL stock, it is not about petchem or refining but about telecom and more specifically about Jio. The crux here is to own the entire telecom value chain from infrastructure to hardware to software to content and eventually the entire customer experience. Here is how RIL is going about it!


Betting on LTE and hardware…


The LTE technology that was adopted by RIL was not entirely proven and tested but RIL chose to bet on that. For now, at least, that bet seems to have paid off. But the bigger bet seems to be the recent announcement of getting into the telecom hardware side of the business. Reliance Jio has realized that the key to the future of the telecom business is data and that can only be achieved by an exponential growth in customers accessing data. The biggest constraint was hardware. Nearly 50 crore Indian mobile users did not have smart phones and that kept them out of the data usage population. The latest Jio plan is to launch LTE enabled smart phones that will be available for a refundable deposit of Rs.1500. That is roughly the price that you pay for a traditional phone and therefore this proposition is likely to open up a huge market. Instead of data driving demand for phones it will be phones driving the demand for data. For the data business that could very well be the tipping point ahead of the big leap.


A big content bet…


If one looks at the acquisitions and stake buys made by RIL in the last few years, the accent on content is clearly visible. First, there was the stake in Network 18 and recently the 25% stake in Balaji Telefilms; both premium properties owning and creating content. The bet is that in the next couple of years more people could be watching soaps and serials on their smart phones rather than on their television sets. It may sound far-fetched now but the trend could entirely reverse in the next 2-3 years if the adoption of hardware is as rapid as Jio expects it to be. Of course, the content bets of RIL are not just limited to these two and extend to a lot more such quality properties.


Owning the experience…


At the end of the day, the RIL Jio foray is all about owning the experience. What Apple did very successfully with the I-Phone was to own the entire ecosystem of the service based on superior design. RIL realizes that it needs to replicate that model partially in India too. The telecom business can be profitable in India only if the service provider can own the entire ecosystem and that consists of the hardware, the content and the customer experience. That is exactly what RIL is focusing on now and each of its recent forays have broadly fitted into this logic. Of course, it’s more power to the customer! ©



RIL Grand Plan - III


Creating value in a tough telecom market…



When the Reliance Group sunk in nearly Rs.250,000 crore into the telecom foray, most analysts were highly skeptical about the ability of the firm to earn return on investment (ROI). As of now, RIL does not still disclose the ROI on its investments in telecom but there are a couple of basic pointers for investors…



Extracting market share…


The telecom market share has been shifting distinctly in the last few months. The free offer from Jio and the shift to priced offers later has resulted in a big market share shift. The problem for other telecom players is that they are losing market share and they are also seeing pressure on the ARPUs. The chart above clearly indicate show the values of these telecom properties are diverging. Over the last 1 year the RIL stock was up by 57.5% while the stock of BhartiAirtel appreciated by just about 11.7%. The big hit was taken by Idea which saw the price falling by (-16%) in the last one year. Vodafone may not be listed but the value destruction has forced it merge with Idea even as Airtel has benefited more from its towers.


Pricing could be the key…


In the battle for market share, the key aspect could be pricing. While Airtel has average revenue per unit (ARPU) of a little under Rs.140,the ARPU of Idea is a lot lower. Jio, on the other hand, will start off with an ARPU of Rs.309 at the bare minimum. This will ensure that the capacity to extract value from each additional customer will be much more in case of Jio than in case of competition. When higher market share combines with higher ARPUs, the valuation divergence between RIL and competition will be a lot more visible.


But,what about ROI!


That remains the billion dollar question. RIL has sunk in nearly Rs.250,000 crore into Jio and is likely to sink a good bit more. But over the last 1 year, the market capitalization of RIL has moved up from Rs.320,000 crore to Rs.500,000 crore. Effectively, RIL shareholders have already recouped nearly 70% of the total capital investment through value accretion in the parent company. While that may not be the right measure of ROI, it has surely given RIL a better capital currency by investing in Jio than by just focusing on its petchem and refining business. The valuation boost, is perhaps the best indication that the telecom bet has worked for RIL. When the ROI starts and market share increases; that could be Phase-2 of the traction for Reliance Industries! ©



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