Reliance 2.0 can be an efficient business play

While first round of its growth was driven by asset heavy investments, second round likely to be through a much better use of investments and sweating of asset

Reliance Industries is expected to enter the next big growth phase, given the Rs 1,50,000 crore of expansion planned over the next three years. Though the figure has been hinted in parts earlier, it attains significance give that its current gross block stands at Rs 2,40,000 crore plus a capital work in progress of Rs 50,000 crore on a consolidated basis.

What is, however, more important is the sectors the company will be making these investments in. Reliance currently has an asset turnover ratio of 1.74, which means for every rupee of asset it generates a turnover of Rs 1.74. The businesses that the company intends to invest in are traditional petrochemicals and oil and gas and newer ones like telecom and retail.
 

Petrochemical capacity is likely to be increased from 15 million tonne per annum to 25 million tonne per annum. Petrochemicals have a low asset turnover ratio, hence the impact on top line will not be much, probably in the same ratio as earlier.

Oil and gas continues to be a mystery for the company; there were no signs given on when and how production from its KG Basin will increase. The new find comes on-stream only after FY17 further there seems to be no clarity on the pricing front.

However, Reliance’s investment in shale gas seems to be doing well. The company’s share from its investment in shale gas has resulted in 11 mscmd as compared to its current production level of only 15 mscmd.

Contribution of shale gas to its revenue was $616 million with an operating profit of $483 million in FY13. But this too is a very high investment business albeit with a much higher operating margins thus making return on investment more attractive.

It is Reliance’s investment in telecom and retail that will be keenly observed and can spring a surprise. As compared to other players in the telecom space, Reliance has a much lower capital cost, given its low investment in licenses and a lease model of spreading its network rather than creating one.

The telecom sector has a skewed asset turnover ratio, take for example Idea Cellular has a gross block of over Rs 41,000 crore and a turnover of only Rs 19,500 crore while a not so efficient Reliance Communication has a gross block of over Rs 1,00,000 crore but a turnover of Rs 22,000 crore.

Reliance Industries is expected to triple its staff strength and aggressively roll-out its 4G services.

Similarly in the retail space the company has achieved a turnover of Rs 10,000 crore and expects to touch Rs 40,000-Rs 50,000 crore over the next few years. Retail business, being trading in nature, has a better asset turnover ratio.

Future Retail (erstwhile Pantaloon) has an asset turnover ratio of 2.92 on a consolidated asset base of Rs 5,700 crore which achieves a turnover of Rs 21,300 crore. Reliance expects to be more than double the size of Future Retail over the next few years.

While the first round of growth for Reliance was by way of asset heavy investments, the second round is likely to be through a much better use of investments and sweating of assets. The only drawback is it will take some time to unfold.