RIL’s stake-sale in the domestic digital and retail ventures underlines the indispensability of foreign capital
If a stock returning 63% in five months, when the mainline
index improved about 20%, is value unlocking or value bubble has divided the
market. The debate has intensified particularly after Nasdaq shed over 10% from
its peak reached on the back of work-from-home communications facilitators
early September. Technology proceeds comprised just 2.5% of Reliance Industries’
headline turnover last fiscal year. Refining, petrochemicals and oil contributed
nearly three-fourths. The frenzied fund-mopping spread over four months since
end April, however, resulted in the digital holding company constituting about
30% of the consolidated market cap, roughly corresponding to the 36% gain of
the counter in the period. Fourteen global players, ranging from social media
giants, sovereign funds and shrewd big-ticket portfolio managers, committed over
Rs 1.5 lakh crore to the cyber-cum-telecom-based properties for 23 times FY
2020 revenues. World’s most valuable company Apple was trading at 5.76x FY 2019
ended September sales when it reached the historic US$2-trillion market cap in
August. Google’s parent Alphabet was recently quoting at 5.7x 12-month ended
June 2020 offtake. After a seven-week
gap, when India’s most valuable company bought the footfall-, storage and
logistics-related businesses of the Future group for Rs 24713 crore, the money-infusion
exercise restarted, with three overseas angels together picking 4.25% expanded equity
of the retail venture for a total Rs 18600 crore. The modest equity valuation
of 2.62 times receipts of the preceding financial year has translated into about
1.6% lower market cap than of the mobility and interface streams. The higher premium
to 11% of sales and half the operating profit of a brick-and-mortar presence at
a crossroads of real and virtual world can be taken either as the road ahead in the
post-pandemic economic order or a throwback to the dotcom bust in 2000.
Irrespective of the outcome, Mukesh Ambani has set the
template for how Corporate India can snatch victory from despair. Facebook front-lined
a fat-cats’ parade when Brent crude had plunged below US$20 a barrel. The strategy
of diverting attention from the sluggish core to promising sunrise enterprises looks
as controversial as the Federal Reserve’s opening up of no-cost liquidity tap after
the September 2008 credit crunch that marked a bold but workable departure from
the boilerplate prescription of belt-tightening prevalent since the Great Depression
of the 1930s. That the framework is being relied upon to deal with the wrath of
God is a testimony of its durability. Another takeout is there is no substitute
for capital. A first-mover advantage can be overcome if there is a treasury chest.
Reliance Jio Infocomm became the leading cellular services provider by subscribers
in a little over three years since launch in September 2016 by giving voice calls
free and data at the lowest cost anywhere in the world. The parent achieved the
feat at a price tag of Rs 1.5 lakh crore. Even as net liabilities were getting
demolished by divesting 33% control in the online arm, a benchmark was being
set for an imminent IPO, something that would not have been possible had the
high-cost debt been refinanced at zero interest rate. Instead of replenishing of
treasury, inflows would have turned into outflows to service the loans. A
setback was turned into a virtue.
Too many investors are not a crowd. Only a couple of
the benefactors own slightly more than 2% each of the RIL subsidiary. Two
internet giants will hold around 18% of the diluted capital between them, a figure
that can collect more followers rather than posing a destabilizing factor. Many
of them are likely to exit during listing at a hefty gain. Right now, the
shareholders are admiring the agility in underwriting growth, brushing aside the
confusing complexity. Will Jio Mart run by Jio Platforms compete with or complement
brick-and-mortar Reliance Retail operated by Reliance Retail Venture is not clear.
The lack of clarity on cross-subsidization of offerings is unlike the easy-to-understand
oil-to-chemicals businesses, whose performance hinges on efficiently producing fuels
and polymers. Consumers enticed by cheap basic services are expected to be lured
by the click-and-bait higher-margin fare on a crowded menu, whose tariffs will have
to be constantly revised to preempt or react to competitors. Investors’ impatience
with the flat trajectory of the stock for over eight years since mid-2009 amid
concerns of the overhang of nascent diversifications had to be quelled by a 1:1
bonus over three year ago. The test will be the discounting that the standalone
entities will grab.
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