Should I invest in Reliance Industries?
Reliance Industries Limited - how I share India's growth with a single share
I first mentioned Reliance Industries Limited in my analysis of Qualcomm (collaboration on Reliance's Jio Phones) and Apple (collaboration on the sale of iPhones in Reliance's retail stores). The last time I mentioned Reliance in my report on the Wirecard Annual General Meeting, the time was ripe to give at least a brief introduction to the company and to deal with the latest developments.
1. How does Reliance Industries Ltd. earn his money?
Reliance is an investment that is synonymous with Kostolany's stock market slogan: "You make money on the stock exchange with your seated meat" and can be counted under the category of "boring" investments. After a more or less sideways phase since the beginning of the year, the share price has suddenly risen by 20% since the beginning of July (see the following figure).
This rise in share helped CEO and founding son Mukesh Ambani - one of the world's most successful CEOs according to Harvard Business Review (though not as well known as his US counterparts) and the first non-US citizen on Bank of America's Board of Directors - occupy the throne as the wealthiest person in Asia and trump his Chinese rivals Jack Ma (Alibaba) and Pony Ma (Tencent). The astonishing thing is that this event received hardly any media attention and it was only by chance that I became aware of it myself. This in turn confirms my statement that it is a "boring" investment.
A closer look at Reliance reveals that the company's development is anything but boring. With a market value of USD 103 billion, Reliance is India's most valuable and most profitable company by market capitalization. For example, if Reliance were listed in the Dax, it would be the second most valuable company after SAP in terms of market value.
Reliance set a new profit record with sales growth of 30% and profit growth of 20% in the last fiscal year. Since Reliance generates 80% of its sales, or USD 67 billion, with the refinery and petrochemicals business, the company was particularly fond of the rise in oil prices and the flourishing (global) economy. It is worth mentioning in this context that Reliance operates the largest oil refinery in the world in Jamnagar, India.
At the same time, Reliance is building a cash cow with the telecommunications division Jio, which was founded in 2016, which will help to position itself more diversified from the cyclical refining, oil and gas and petrochemicals business.
It is impressive that less than two years after commencing operations with over 186 million customers as of March 2018 (corresponds to 14% of the Indian population of around 1.3 billion), the telecommunications division rose to become the largest mobile communications company and third largest telecommunications company in India, with direct profits has made.
In the quarter to the end of March alone, 27 million customers were acquired. The share of sales was only five percent of the company's total sales. But taking into account the growth rate, the share of sales should increase rapidly. According to its own information, Reliance plans to equip 99% of the Indian land area with 4G / LTE coverage by December 2018.
Jio has its own smartphone brand and, in addition to the classic telephony function, offers a messaging, TV, video on demand, news, payment and e-commerce app.
Reliance also messed up the competition with its telecom division. Vodafone India, the subsidiary of the British Vodafone Group, had to merge with Idea Cellular due to declining margins. Norway's Telenor, which was also active in India until recently, has sold its Indian division to Bharti Airtel. India's telecom sector is therefore likely to be dominated by these three providers in the future.
If you want to get a more detailed picture of Mukesh Ambani and Jio's potential, I recommend the following video. Mukesh Ambani presents the launch of Jio and is celebrated like a superstar. I find the importance he attaches to digitization and his saying: "data is the oxygen of digital life" (from 14:50 minute) particularly impressive. This shows why he founded a telecommunications company and connected a variety of apps directly to build an ecosystem and collect as much data as possible. At the same time he recognized the spirit of the times. You could say that he “bridled the horse from behind” and converted an industrial and chemical company into a modern technology company.
In addition, Reliance owns a total of 7,571 retail stores as of March 2018 (an increase of over 100% compared to the previous year) and thus the largest retail network in India in the food, clothing, telecommunications and electronics stores. The company also operates 495 petrol stations.
In addition, Reliance has the most extensive, most profitable and most profitable retail network in India. The retail sector contributed around 15% or USD 10 billion to the company's total sales. Retail sales grew 105% year-over-year and at an annual rate of 45% over the past five years (that is, sales double every two years).
The following figure illustrates Reliance's retail store coverage.
Given the current and future potential of Reliance's customer base, it's easy to see why companies like Apple and Qualcomm want to do business with Reliance.
The following figure provides a graphical overview of the individual segments of Reliance:
2. Why has the price soared so explosively?
According to media reports, Mukesh Ambani is planning to optimize the online-offline connection of his retail network by setting up an online marketplace and using his branches as a logistics network. This would mean that Reliance would increasingly compete with Amazon and Flipkart in the areas of e-commerce and last mile delivery. (U.S. retail chain Walmart closed a $ 16 billion deal in May to acquire a 77% stake in Flipkart.)
On the one hand, Reliance has the advantage that it can collect, use and exhaust data on consumer behavior via its telecommunications network, its customer base and its retail network.
On the other hand, Reliance is familiar with consumer behavior, needs, challenges and the legal regulations of the home market and is already represented nationwide with its own branches.
According to Philip Cheng, FedEx Express Vice President, Ground Operations in India, retail is one of the fastest growing sectors in India and is expected to grow from USD 70.45 billion in 2016 to USD 111.25 billion in 2019. This corresponds to a growth of 60% in three years.
In my report on the Wirecard Annual General Meeting, I already described that Wirecard CEO Mr. Braun sees great potential in India and compared India with China's development stage 10-15 years ago. I could imagine that Reliance with its JioPhones, its JioMoney app and its customer base would be a predestined potential partner for Wirecard in order to benefit even better from India's potential.
In addition, Reliance has the financial means to realize the potential in India. It is worth mentioning in this context that, according to the international rating agencies Standard & Poors and Moody's, Reliance has a better credit rating than the Indian state.
There are also rumors that Reliance intends to split off the telecom division, go public and expand into Europe via Estonia. Thanks to the e-government solutions of the Estonian state, the regulatory hurdles for market entry are lower and Reliance would have access to the European telecommunications market in this way.
Reliance is getting additional tailwind from Prime Minister Narendra Modi's economic, currency and tax reforms, which further promote economic growth and drive digitalization (e.g. standardization of tax rates, switch to cashless payment systems). According to Statista, India's forecast growth rate in 2018 is 7.3%, which is higher than China's growth rate of 6.6%.
With the aforementioned points in mind, it is certainly understandable why I invested in Reliance in order to participate in India's growth.
In particular, the fact that India has great development potential in terms of development stage, is growing disproportionately in an international comparison and, together with China, is one of the most populous countries in the world, offer a great opportunity.
The broadly diversified line-up in business areas, which meets the basic needs of the Indian population with an increasing focus on digitization, speaks in favor of Reliance as an investment. In addition, the company is managed by a successful, internationally recognized and visionary founding son and CEO.
In addition, after reading my post, you can imagine why I annoy my friends with thinking not only of China, but rather of India when starting a business.
For the sake of completeness, it should also be mentioned that Reliance's shares in Germany are traded as GDR. This means that the certificates are backed by shares in the company (analogous to, for example, Alibaba and Tencent from China). I bought my shares on the London Stock Exchange because the trading volume there is very high compared to the German stock exchanges. This in turn has the advantage that the difference between buying and selling prices is smaller.
Investors for whom an investment in an Indian company is too sensitive or opaque can also participate in India's growth through investments in global companies such as Apple, Amazon and Walmart. At the same time, investors can check the share of sales from India or Asia in the annual reports of the individual companies and select companies that have a high share of sales in India.
Another alternative to participate in India's growth is to invest in funds or ETFs with a focus on India or Asia. At the same time, economic policy and currency risks must be taken into account.
I hope that my article offered you added value and that you were able to take something with you for your own investments. Good luck for the future!
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Güner Soysal, July 22nd, 2018
Founder & CEO, Investment Analyst (M.A.)
Sources & Links
All content to the best of our knowledge and belief, but without guarantee for topicality, correctness, completeness and accuracy. The column is for informational purposes only and does not constitute an invitation to buy or sell the securities mentioned. The author is not liable for material and / or immaterial damage caused by the use or non-use of the content or the use of incorrect or incomplete content.
Disclosure of conflicts of interest: At the time of publication, the author directly or indirectly holds positions in the securities mentioned: Reliance Industries Limited, Wirecard, Apple, Tencent, Alibaba, Qualcomm, Amazon. The author does not intend to directly or indirectly enter into transactions in the securities mentioned within 36 hours of publication.
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