The annual general meeting (AGM) hosted by Reliance Industries (RIL) is a highly anticipated event in the corporate calendar. Investors look forward to it to gain insights into the conglomerate’s future plans. The management at Reliance, and Mukesh Ambani in particular, have a history of using the AGM to make significant announcements, such as the launch of Jio and new energy investments.
The RIL stock has underperformed the Nifty 50 index in the past year. Several factors, including high capex pressure, rising debt, poor capital returns, and lack of clarity regarding the listing of Reliance Retail and Reliance Jio, have contributed to this. So the AGM of 2023 was critical, as investors sought more clarity.
Disappointingly, the management refrained from giving out any guidance on the listing of these new ventures, resulting in a more than 2.5% drop in the company's stock price post the AGM.
RIL underperforms Nifty 50 over the past year
Mukesh Ambani, the Chairman of Reliance, did address one significant aspect during the AGM: the company's succession plan. His three children, Aakash, Isha and Anant, are set to be appointed to the board of directors at RIL.
Clearly, it’s easier to become a CEO at thirty if your surname is Ambani – the company has unapologetically embraced its identity as a family-run conglomerate. These Ambani siblings were already serving as directors on the boards of RIL’s subsidiaries, Reliance Retail Ventures and Jio Platforms.
In their early thirties, Aakash and Isha Ambani have been leading the show at Jio and Reliance Retail, respectively, for some years now. Aakash was even named the chairperson of Reliance Jio Infocomm last year. The youngest of the three, Anant Ambani, who is still in his 20s, has been involved in the new energy business.
Mukesh Ambani will continue to groom these young leaders over the next five years. But the challenge ahead is immense, given that Reliance is India's largest company by market cap. Only time will reveal whether this new generation can successfully steer this corporate giant into the future.
Ambani identifies Jio Financial Services as the new growth engine
RIL’s chairman is bullish on the recently listed subsidiary, Jio Financial Services, to drive long-term growth. The demerged company will be involved in consumer and merchant lending, a fast-growing market in India, and will also foray into the insurance and asset management businesses.
Last month, the company inked a partnership with BlackRock to form an AMC. The Indian mutual fund industry had an AUM of Rs 46.38 lakh crore by the end of July. The space is already competitive as there are around 44 registered mutual fund houses in India, SBI being the biggest in terms of AUM.
The MF industry’s AUM has the potential to rise to Rs 100 lakh crore in the next 5-6 years. This translates to a growth CAGR of around 14%. This suggests ample room for growth. However, Jio Financial will face competition from well-established players. Even the Insurance industry has around 67 companies, with LIC holding a major share in the market.
Making a name in the financial services industry will be no cakewalk. However, Jio Financial’s access to the huge distribution network of the Jio and Retail units (have 69 crore customers combined) will serve as a major advantage.
Ambani places big bets on the retail business
Ambani also unveiled his plans for the retail business during the AGM, and discussed new product launches, project completions and future growth strategies. Commenting on the growth aspect, he said, “I am confident that as India grows from a $2,500 per-capita economy to a $10,000 one, Reliance Retail will be our fastest-growing business in terms of revenue and EBITDA.”
Reliance Retail’s revenue has risen at a 17% CAGR over the past three years. EBITDA also rose faster at a CAGR of over 20%, owing to margin expansion. The company aggressively expanded its store count and retail space over the years, which ultimately drove the top line more than same store growth.
RIL's revenue surges at 15%+ CAGR as store area expands
The grocery division has been growing the fastest, followed by consumer electronics. Isha Ambani has structured the fashion and lifestyle vertical into a house of brands by acquiring popular labels. But this segment has underperformed in terms of growth, especially in the past two quarters due to an overall slowdown in discretionary demand.
Revenue growth for the retail business was not as high as the rise in store area in FY23. This also goes to show that the per-sqft sales growth may be modest at best. However, the management may continue to invest in building the store footprint in Tier 2 and 3 cities. The focus on domestic and international acquisitions is also intact.
RIL is receiving a lot of investment interest for this division, according to the Chairman. Notably, Qatar Investment Authority is set to pick up a 1% stake in Reliance Retail, which will double its valuation to roughly $100 billion in three years.
But it's essential to recognise that the Indian retail game is highly competitive, with many players expanding aggressively, and selling to price-conscious consumers. This also explains why Reliance has low margins here.
Despite contributing over 20% to the revenue, the retail business accounted for just 12% of RIL’s EBITDA in FY23. In contrast, Jio captured a much larger share between FY19 and FY23.
Retail and Jio businesses command over 40% of RIL's profit pie
Chairman lays out multiple avenues of growth for Reliance Jio
Reliance Jio’s revenue has grown at a robust CAGR of 19% between FY20 and FY23. Its EBITDA outpaced revenue growth, driven by better margins and increased average revenue per user. However, telecom subscriber growth has moderated post FY21, reflecting a broader trend in the Indian market.
Reliance Jio's EBITDA soared between FY20-23
As a response, the management is now focusing on the home broadband segment, enterprise (B2B) business and the transition of consumers to the 5G network to drive future growth. It also seeks to expand Jio Platforms globally.
Reliance Jio has already completed the minimum rollout obligation for the 5G spectrum waves allotted to it. Jio’s 5G service now covers 96% of Indian towns and commands a customer base of over five crore. Its ARPU will also get a boost as customers steadily upgrade to the ultra-high speed 5G service.
Jio's ARPU surges 24% post FY21 but subscriber growth remains moderate
To tap into the home broadband market, Reliance will launch Jio AirFiber on September 19. This device will utilize the company’s 5G network to provide wireless internet services to home users. Jio already has a wired broadband solution in the market by the name of Jio Fiber. This new product is a step ahead as it negates the need for last-mile fiber connections.
Through this wireless service, Reliance Jio, according to the company, has the potential to serve over 20 crore higher-income households and premises in India. Commenting on its potential, Ambani said, “Through optical fiber, we can currently connect around 15K premises daily. But with Jio AirFiber, we can supercharge this up to 1.5 lakh connections per day.”
Jio AirFiber will also support the introduction of Jio Smart Home services, creating homes where users can manage all home appliances through an app. According to the management, over 80% of data consumption in India happens indoors, and the company aims to leverage this untapped potential.
RIL’s dreams come at a cost
Mukesh Ambani is hoping that Reliance will create greater shareholder value over the next decade than what it has generated in the past 45 years, as the economy enters a high-growth phase. To achieve this, RIL accelerated its investment pace in FY23. Its capex rose by over 40% in FY23, driven by higher spends in the retail and Jio businesses.
RIL's FY23 capex rises over 40%, free cash flows turn negative
However, this aggressive investment into these capital-guzzling businesses has weighed on RIL’s capital returns and free cash flows. Its free cash slipped into the negative zone in FY23. Additionally, its return on capital employed has been below the 10% level for three years now.
Going by the consensus estimates of analysts, RIL’s revenue and net profit growth may moderate in the next two years. This may be due to the weakness in the O2C business.
RIL's growth to moderate in the next two years
Dhirubhai Ambani, the founder of Reliance, dared to dream and turned those dreams into reality in the era of License Raj. His successor made even bigger strides. Today, the company is known for its deep pockets, its eye for opportunity and its project execution skills. Investors will be watching to see if the conglomerate can pull off the twin challenges of an ambitious succession plan, as well as an aggressive growth strategy, over the next decade.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.