RIL's home team advantage

India's complicated e-commerce policy with restrictions on overseas investors may help keep out global retail and e-commerce players

The Reliance Industries (RIL) AGM focused on digital, retail and media (D+R+M). Here are some takeaways. Thanks to recent massive investments in Jio Platforms, RIL is debt-free. The cost of financing has dropped drastically. The equity base for Jio Platforms has apparently, not expanded and RIL will retain full control. Given the large war-chest and strategic partners including giants Google and Facebook, it’s well-placed for future growth.

Jio has also developed its own 5G solution. It targets growing telecom subscriber base from the current 380 to 880 million over three years — this implies it will grab a huge chunk of Vodafone-Idea and BSNL subscribers.

As of 2019-20, D+R+M together contributed 30.5 per cent of RIL’s revenues and 37 per cent of operating profits (Ebitda). Revenues from these segments could soon contribute 50 per cent of RIL turnover. Retail grew 25 per cent YoY in 2019-20; Digital grew over 40 per cent.  The refining and marketing division, the petrochemicals division and exploration together contribute 69 per cent of revenues. These divisions saw revenue contraction due to slack demand and lower crude prices. There is lack of clarity about timelines for spinning off energy and chemicals with attendant investments from Aramco.

D+R+M will continue to grow much quicker than energy and chemicals. There is a unique model. Jio holds dominant market share in telecom. The dominance will grow once 5G auctions are held since it the only entity with the money to bid for 5G spectrum, and rapidly rollout 5G services.

Down the line, the group has considerable, growing market share in organised retail. It can create seamless digital payment options, via Google Pay and its own fintech solutions. It can connect customers to retailers, via WhatsApp and Jio Meet, letting customers see products and have them demonstrated online, before they pay with a click.

These transactions will generate massive end-to-end data. Jio would know a lot about customers including bank details, residence, location 24x7, handset usage, other product preferences, eating habits, entertainment choices, payment preferences, etc. If it digs a little deeper and ties residency to publicly available data like voter lists, and voting patterns, Jio will be able to make good guesses about political preferences too! Depending on the deal with Facebook, it could learn even more about friends, hobbies, etc.

Importantly India doesn’t have a personal data protection law. So Jio Platforms can, as of now, mine data it collects as it pleases. That could help Jio micro-target customers, and the data will also be monetisable in other ways.

How does one value this business model? The stake sales seem to value Jio Platforms at roughly $60 billion (bn) at the moment (plus/ minus say $3 bn) but there isn’t a peer anywhere for comparisons. After the spinoff of petrochemicals, refining, and others, and an initial public offering (IPO) for Jio, valuation will be simpler.

But it still won’t be easy.  In D+R+M, the sum of the multiple businesses is greater than the value of each separate part. A sum-of-the-parts valuation of separate segments would under-value the entire model. Any IPO or spin off will unlock even more value and we can reasonably assume shareholders in RIL will gain, post IPOs and spinoffs.

The economy-wide impact of high market share in D+R+M is not so easy to judge. Telecom monopolies tend to have poor externalities, and negative effects. Any­body who used an Indian landline or internet connection, prior to the 21st century, would know telecom monopolies can deliver poor service, with high tariffs and zero innovation. Consumers end up suffering if there’s no competition so let’s just hope Airtel and Vodafone Idea can compete.

It’s even harder to guess fintech, and retail outcomes. The Jio dominance may, or may not, be quite so strong in those segments. Monopolies do tend to develop naturally in organised retail, and e-commerce – think Walmart, Amazon and Alibaba. Such monopolies also get high valuations. Amazon trades at 140x PE while Alibaba is at 32x.

India’s complicated e-commerce policy with restrictions on overseas investors could help to keep out overseas retail and e-commerce players, giving RIL a “home team” advantage. Fintech too may see a shakeout. Jio backed by Google Pay, will gain market share if it becomes the default option for retail consumers. This gives us an insight into why so many marque investors want a slice of Jio.