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Reliance AGM – Points not be missed amid excitement !

Reliance delivered a highly impactful AGM on August 12, 2019. In the excitment of many positives, one should not forget some important points.

As I am writing this post, Reliance Industries Limited (RIL) is up almost 12% at very high volumes. I don’t remember many days in the history, when a large cap stock like RIL would have moved so much in first few hours of trading.

The positive move was widely expected post yesterday’s AGM (Annual General Meeting). However, of this magnitude, not by many…

Analysts and investors both loved what they heard from the Chairman, Mr Mukesh Ambani. He spoke and laid the roadmap for every key point affecting RIL’s future fortunes.

There is tons of news flow around the positives. So in the interest of not being repetitive to my readers, I will be only listing down the positives. I will follow it with the purpose of this note, i.e., the points that one should be much conscious of and needs to watch closely.

Key positive takeaways
  • Proposed 20% deal with Saudi Arabia’s Aramco, in oil to chemicals (O2C) business at an enterprise value of USD 75 billion.
  • Target to become net debt free by March 2021 – through controlled capex, strategic divestments and internal accruals. 
  • To play big on digital transformation of India focusing on consumer, merchants and enterprises through varied solutions including wireless, wired, IOT, cloud, start-ups, point of sale terminals etc.
  • Attractive pricing along with freebies to target a larger consumer base in each of the segments.
  • Strategic tie-up with Microsoft for cloud and productivity solutions.
  • Jio and Retail to be listed in the next 5 years.
  • Unseen rewards to shareholders through value unlocking, dividends and bonuses.

Every single announcement is highly impactful and has wowed the analysts and investors alike.

Points to be watched closely
1. Details of the Aramco deal
It’s important to note here that the announcement made is “20% at USD 75 billion Enterprise Value”. The key is Enterprise Value, which also includes debt in the target business.

Most news sources, however, are simply mentioning the Aramco’s expected investment to be USD 15 billion, i.e., 20% of USD 75 billion.

I do understand that in the O2C standalone business, the net debt would ideally be a small part of RIL’s total net debt of about USD 23 billion. However, given the complexities normally involved at the group debt level, I would be keenly looking at more details of the deal before committing towards a number.

Please think, if it was so easy, why the Chairman himself could not have given a concrete number instead of mentioning about Enterprise Value?

2. Lot of battlefields have been thrown open
Mr. Ambani is a visionary and all of us are aware what he has achieved with Jio by his sheer grit, determination and financial muscle.

Since yesterday, I am still counting the names of businesses (large and small, national and international) that will get impacted by various announcements. So far, the direct impact was mainly limited to the telecom players (Airtel, Vodafone-Idea). However, now it’s also Amazon, Google, Netflix, Dmart, Samsung, Sony, Future Group, Tata Sky, PVR, Inox, Banks and so on.

Agreed, that with some of these he might co-brand or co-partner but then most will also be wary of the long term implications of the same. Besides, some of these are behemoths, who themselves have significant ambitions and also financial muscle to make the game interesting.

3. Consumer experience is the key
It’s been more than 2 years since Jio mobile services were launched, followed by Jio broadband last year. Basic services seem to have been well stabilised by now.

However, based on yesterday’s AGM, I personally feel that going forward there would be a higher focus on integration and promotion of value added services (for higher customer acquisition, stickiness and revenues).

This is all good and in the right direction. However, it would also mean increased expectations of the consumer demanding consistently better content, interface, speed and quick grievance redressals.

4. Capex plans should be continuosly monitored
The Chairman clearly mentioned that most of the significant capital expenditure requirements are already over and the laid out infrastructure has the capability to provide speeds upto 1GBPS.

I agree that 1GBPS is significant by any standards. However, I would still believe that the way world is moving it is difficult to say what lies next. There are continuous breakthroughs in modes of delivery and the efficiency. Besides, the way Jio plans to intergate vaue added services, only the time will tell the efficacy and the sufficiency of the laid out infrastructure.

5. Revenues vs expenses
Jio mobile has been charging the customers for sometime now and Jio broadband will start charging from September 2019. Mr Ambani further detailed about various other revenue streams to start over the next few months.

However, at the same time, he also mentioned about freebies that would be provided to the customers e.g., hardware including Led TVs, OTT apps, games, Fist day first show movies etc. All these inclusions would entail cost for the Company and how Jio structures it’s revenues to compensate for these expenses would be critical.

The purpose of this post is not to underplay yesterday’s announcements. As an investor it ticks all the right boxes for me and I am surely excited. However, amid all the excitement I continue to keep my guards open !

Be fearful when others are greedy and greedy when others are fearful - Warren Buffett Click to Tweet

Disclaimer: These are my personal views and not any recommendation to the reader. The reader should do his own independent research before taking any investment related decision.

Illustration Credit: vecteezy.com

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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Neeraj Gutgutia
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Neeraj Gutgutia

The first point about enterprise value (not equity value) and media making simple calculation that $15 billion would come in is very interesting.
Same was done bun RIL owned channels like CNBCTV18. And RIL has not clarified it.
Now if RIL gets less than that, it would be a big negative and RIL would be liable to misleading the investors.
Even Aramco has mentioned that deal is at very initial stage. Does this mean that it was RIL way of looking for more suiters at a high valuation ?

Sunil Ghotge
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Sunil Ghotge

Well-written, Balanced View.. Agree.. Having been an investor with Reliance since 1986, and having tracked the achievements of MDAG right from Patalganga days, must say have now turned cautious .. accelerating the lightening of weightage in my portfolio (the process I started in 2017 and continued thru 2018) !!

Shirish
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Shirish

Liked the article. However, the EV as per 2019 AR is about 155 billion $ of which probably 75 billion $ is assigned to O2C part. Also the debt as per AR is 38 billion $, of which Aramco will bring in 15 billion $. It still is a puzzle to me how they are going to be debt free in 18 months. They are also talking about selling stake in jio & retail. Also the biggest question is how Aramco deal will be structured without equity dilution for first 5 years. Does it mean they will take 20% of the profits of O2C division for this period? What happens to retail investors during this period and after 5 years when they will demerge O2C division? As usual more questions than answers in the annual AGM!

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