How Mukesh Ambani is rewriting RIL’s future

The chart-busting began in May. Reliance Industries Ltd (RIL) became India’s biggest enterprise by revenue (₹6.23 lakh crore in FY19), going past state-owned Indian Oil Corporation (₹6.17 lakh crore). This pushed RIL to No. 1 in Fortune India’s 500 list (published in December)—which it also topped in terms of profit and market capitalisation—to add to its top rank among Indian companies in the Fortune Global 500 list. (It had been at No. 2 on both lists since their inception in 2010 and 2004 respectively.)

The momentum didn’t flag. At 10.10 a.m. on November 28, RIL’s share price touched ₹1,579, making it the first Indian firm to reach the market capitalisation milestone of ₹10 lakh crore. This called for a touch of smugness in the plush fourth floor executive offices of Maker Chambers IV at Nariman Point, Mumbai.

But by the afternoon of November 28, the morning’s win was already old news at the RIL headquarters. The focus had shifted to moving RIL into the top 50 most valuable companies category by March 2020. It stands No. 66 on the ongoing list—compiled based on market capitalisation—led by the likes of Apple, Microsoft, Amazon, and Alphabet. No Indian company has ever made it to the top 50.

The ‘how’ of this potential climb was clear too: By increasing its telecom arm Jio’s tariffs to keep up with competitors’ price hikes. This, analysts expect, will improve earnings and up the stock value. Two early December equity reports by broking firms CLSA and Nomura have fixed target prices for the stock at ₹2,000 in the next 12 months (from ₹1,583 as of December 13, 2019). The promising projections would, again, be enough for most organisations to stay with the status quo.

But RIL isn’t most organisations. And Mukesh Ambani isn’t most business leaders. For the last couple of years now, the chairman and managing director of India’s most valued company has chosen to steer his giant ship into the tumult of uncharted waters. However, even he wouldn’t venture into the unknown without well-defined goals in sight.

A few months ago, the target was as simple as managing optics. On August 5, research firm Credit Suisse had re-rated the RIL stock, revising its target price downwards to ₹995 because of the firm’s ballooning debt and Jio’s stagnating average revenue per user (ARPU). Almost on cue, on August 12, at RIL’s 42nd annual general meeting (AGM), Ambani announced a plan to make his company debt free in 18 months. He also used the stage to announce that Saudi Arabia oil major Aramco would take a 20% stake in RIL’s cash cow—the oil-tochemicals business; he added that his firm was scouting for similar partnerships for the retail and telecom businesses too. “Our partnership with Saudi Aramco is best placed for value creation and we have received strong interest from strategic and financial investors in our consumer businesses, Jio and Reliance Retail,” he tells Fortune India.

This move was a paradigm shift for a company that has always gone it alone, even as far as writing software programmes for its own billing systems. As was this unusual: Bringing in partners into their core businesses, especially when other business houses like the Tatas or the Birlas are increasing their stakes in their companies.

These, along with other moves, leave little doubt that Ambani Redux is changing the game for Reliance. Not because he has to, but because he wants to make a shift from the decades-old growth strategy first espoused by his father and company founder Dhirubhai Ambani, which was to deploy five years of future anticipated cash flows into new business expansion. RIL had continued on that path and, in the last five years, invested ₹5.4 lakh crore in expanding its petrochemicals, telecom, and retail businesses. Ebitda margins from those businesses in FY19 were nearly ₹85,000 crore. (A recent report by financial services firm Motilal Oswal points out that though RIL had the highest profit after tax between 2014 and 2019, it also had the lowest free cash flows during those years). Although Ambani now expects Ebitda margins to grow at 15% annually, he has no immediate plans to deploy them in any large project. He wants the new businesses to be asset light and, importantly, more intellectual property (IP) driven.

Now, though the new approach was unveiled at this juncture, it wasn’t devised to combat the debt burden. That could have been paid off in three years given current cash flows. “At Reliance, we never had the opportunity to go debt-free as we were relentlessly pursuing investing in huge projects,” says Alok Agarwal, chief financial officer at RIL

Instead, what has driven the new school of thought is the growth of technology companies and the shifting order in the industries ruling the roost, as also indicated by the changing composition of the Fortune 500.

When Ambani took charge at RIL, after Dhirubhai passed away in 2002, the top 10 U.S. corporations in the Fortune 500 were primarily those from the refinery, auto, cigarettes, oil, and finance industries. Retail giant Walmart led the list then, as it does now, although the balance top 10 has seen a churn. Newage businesses like Amazon and Apple are regulars, as is telecom bigwig AT&T; in a recent trend, four companies associated with the healthcare space (UnitedHealth Group, McKesson, CVS Health, and AmeriSourceBergen) feature too. In the U.S., there is a clear diminishing in the clout of refining and finance firms (the absence of Citigroup and Chevron Texaco is telling), although the top companies globally are oil refining firms (Royal Dutch Shell, China National Petroleum, Saudi Aramco, and BP).

Ambani has often cited the Fortune list as a marker of, well, fortune. However, as compared to the global list, which tends to be skewed towards government-owned energy and finance businesses, he finds the U.S. pecking order more democratic, reflective of changes in the economy and society. His own decision to focus on new businesses, which will exploit the assets he has created in the oil-to-chemicals, telecom, and retail businesses, is in line with that rejig.

This segues well into his intent to move away from industries that involve a high regulatory oversight. The rules of managing the political aspects of doing business are likely to get more onerous and CEOs who have met Ambani say he wants to keep the next generation—his three children Akash (28), Isha (28), and Anant (24)—away from the challenges of navigating those hurdles. They are, of course, in the same age bracket as Ambani was in the mid-1980s, when he was thrown into the deep end, left to fend off allegations of influencing policy to favour RIL, after his father had suffered a stroke. The overhang of system-manipulation continued over the last decade, with Reliance being charged by competition and pressed by media about extracting concessions in the gas business as well as influencing policymakers in telecom.

However, though Akash and Isha (both directors on the boards of Reliance Retail and Reliance Jio Infocomm) have been cocooned from the cut and thrust of the politics of RIL’s businesses, they have had front-row seats to their father’s ability to pivot at a time he may have been expected to slow down. Sixty-two—Ambani’s age—seems to give old horses new tricks in India Inc. Especially if said horses are the country’s leading business leaders.

In 1994, 62-year-old Dhirubhai, though hampered by a stroke, had inaugurated the phase II expansion of the Hazira petrochemicals complex, which went on stream in 1996-97. And in 1999, he commissioned the Jamnagar refinery project; he later oversaw and endorsed his son’s telecom plans and the company’s diversification into power and finance too. At the turn of the century, Ratan Tata, also 62, had to contend with flagging morale at the Tata group. Tata Motors had just made the biggest loss in local corporate history. The challenge energised Tata who assumed a strategic role to create a greater international presence. As economic growth picked up, Tata pushed his group companies to buy out Jaguar Land Rover (Tata Motors) and Corus (Tata Steel). It follows, then, that at 62, Ambani, too, is upping the ante. Having made acquisitions worth over $1.7 billion in the media, telecom, and digital technology space in the past 24 months, he is drawing a fresh blueprint for his company. “This is the age of disruption and there is no room for linear and static growth models,” he says. “At Reliance, we have been ruthless in reshaping our growth model in response to the global realities.” One of those new realities is that data, as Ambani famously said at the time of launching Jio, is the new oil.

Staying with that thought, he is building a new company that will house all the digital services on the Jio telecom network—music, entertainment, data hosting, online health—and make it a one-stop access to a host of utilities. His rationale: The market values these aggregator-type companies (think Amazon, Tencent) more than traditional businesses, believing that they drive efficiency.

“Reliance is making a strategic transition to become a Platform Technology Company and we are currently focussed on creating multiple platforms that will accelerate our growth and create significant societal value,” Ambani says. The last two years have also seen a calming in the pace of deployment of resources, both in the oil-to-chemicals business and in telecom. As a result, in the last quarter, Jio’s capital expenditure was ₹5,000 crore, less than half of what it was in the previous quarter. The timing of the end of the capital expenditure cycle (largely concentrated between 2012 and 2017), says a senior employee, coincided with the weddings of Akash and Isha, combining to give the work-driven Ambani time to pause and reflect. It also freed him to increase his travels to meet thinking heads around the world. A couple of years ago, he invited Stanford University futurist Tony Seba to talk to RIL’s top executives about technological disruption, especially in energy and transportation. His overarching intent is to generate and dwell on ideas.

“The new ideas on the table are around education, agriculture, health, and finance, where we want to leverage our access to consumers across businesses,” says P.M.S. Prasad, executive director and RIL board member, who was instrumental in executing the refinery projects. “In the executive suite, we are constantly churning ideas on what and how we should do business. You will soon hear about JioMoney and finance as we want to be doubly sure of how we play this business. We are just warming up to a new phase in Reliance.” Ambani is also said to be examining an old favourite theme—the diagnostics business—since he believes Jio could make remote centres a reality.

As mentioned earlier, there has been an unexpectedly growing amenability to acquisitions—particularly in the technology space. Be it in retail, music or data sciences, the earlier RIL would have attempted to build its own technology or content. But Ambani is now willing to spend top dollar to buy out companies that can be strapped to his own. This includes about a dozen startups, such as chatbot platform Haptik, online music subscription service Saavn, and e-fashion destination Fynd.

Ambani also plans to set up a ₹5,000-crore venture capital fund for startups. Says Anshuman Thakur, head of strategy at Reliance Jio Infocomm: “As all the major capital expenditure is almost over, the focus will now be to differentiate our network and add specialised services. A lot of our acquisitions help us accelerate that.”

Take the Network18 acquisition from six years ago, which kick-started RIL’s investment in media and entertainment companies. The intent was simple: To have a ready supply of content when Jio went live. This need for video content—especially live sports and entertainment—was accentuated with the popularity of its content aggregator app Jio TV. It led to the acquisition of small stakes in Balaji Telefilms and Eros Entertainment to broaden Jio’s offerings in TV serials and movies in addition to what it has to offer through Colors TV, RIL’s joint venture with Viacom18.

Ambani has, however, realised how competitive the media space is, with the likes of deep-pocketed and content-driven multinationals like Star TV, Disney, and Netflix holding sway. He has sought a tie-up with Sony Entertainment Television to make the business scale-worthy. (At the time of writing this, Sony executives from Japan were conducting due diligence to buy a substantial stake in Network18’s entertainment business.) The news media business— which was rumoured to be up for sale—will stay with RIL for now. Says a senior partner, who heads the entertainment practice in a consulting firm: “Reliance will take years to create competency to play against the global entertainment majors as this business is more about legacy than money. So Ambani seems to have taken a more pragmatic approach to collaborate rather than build an entertainment empire on his own.”

Instead, he is choosing to focus on an area which he can dominate: Telecom. Jio’s next phase of growth, its Internet of Things (IoT) services, is expected to generate revenues of $1 billion over the next couple of years. In September, Jio announced the commercial launch of its FTTH (fibre-to-the-home) business and set itself a target of 20 million homes over the next few years. The response has been lukewarm thus far, primarily due to the pricing. Also, since each home has to be wired with a delicate strand of fibre in the last mile, the FTTH process has been time-consuming with poor offtake. That said, since FTTH to both homes and enterprise are priced much higher than mobile services, analysts expect that, over the next five years, the business will shore up ARPU. The increasing tariff will make Jio the single biggest contributor to RIL’s enterprise value by 2024. In a recent report Kunal Vora, telecom analyst at BNP Paribas, said: “The recent tariff hike will increase ARPUs by 20%-25% and 75% of the incremental revenue to add to gross earnings of the telecom companies.”

Monetising Jio is a priority at RIL, and the new aggregator platform—which will hold all the Jio apps—is key here too. It will become the company that holds all the services which don’t fall under the telecom licensing. The structure will be as follows: The platform, as a wholly-owned subsidiary of RIL, will own Reliance Jio Infocomm which, in turn, will hold the licence for providing mobile and broadband services. The platform company, which will render additional services to more than 350 million subscribers of Jio, will become more valuable than the telecom network, believes Ambani, and needs to be monetised separately. As Uday Shankar, president of Walt Disney (Asia Pacific) who was instrumental in launching OTT platform Hotstar, puts it: “Jio has really been a catalyst for video viewership in the country and it has also done great work with Jio TV to expand overall viewership.” As a result, the company is likely to seek two strategic investors—one for Jio and another for the platform company. 5

The platform approach extends to the retail business too. At the AGM in August, Ambani said beta trails of Reliance Retail’s digital commerce venture have delivered promising results and the company would soon unveil Reliance New Commerce, integrating merchants, consumers, and producers through a digital platform. He expects the platform to transform the unorganised retail, or kirana, market. At present, the unorganised sector accounts for 90% of India’s retail industry. The RIL e-commerce platform will enable small merchants to have access “to everything that large enterprises and large e-commerce players are able to do”, Ambani had said at the meeting. He estimates that the kiranas will add a $700-billion opportunity to its organised retail quest, which he has been expanding quickly in recent years. “The target for opening new stores this year [2,842 in FY19] is staggering,” V. Subramaniam, executive director of Reliance Retail, says. It is also through the retail business that

Ambani hopes to effect changes in Indian agricultural practices. Already, Reliance Retail accounts for nearly 80% of the sales of fresh fruits and vegetables in the organised business. To do that, over the last five years, Reliance Retail has worked with farmers to harvest their produce in the evening instead of the morning. This ensured that the moisture content in the fresh produce did not decrease substantially, keeping the loss of weight marginal. Post-harvest, farmers use a supply chain mechanism set up by Reliance to bring the most recent produce—at lower rates—to Reliance Fresh stores. Recently, when onion prices hit ₹100 a kg, the Fresh stores sold them 10% cheaper. Says Subramaniam: “Our initial model of having large stores didn’t work but now we are on a roll as we have figured out that 15,000 sq. ft. is the optimal size. We can break even in three months if the rentals stay at 3% of our total cost.”

Though Ambani laid the foundation for the retail business as early as 2006, it was only in 2014 that the company started showing robust revenue numbers. Before that, many of the large format stores opened by RIL had to be closed or scaled down as the business was making losses. Several iterations—including bringing in managers from large overseas retailers like Walmart and Costco—failed. Today, Reliance Retail is the biggest organised retailer in the country, four times the size of the next player (the Future Group). Analysts, however, point out that the revenues of the retail business include sales of Jio handsets and subscription services, which should be a part of the telecom business. To that extent, they indicate double counting.

A retail industry analyst with a foreign bank says: “Among retail stocks, DMart commands a premium valuation because you get what you see and in Reliance, sometimes the growth numbers are unbelievable.”

Retail and telecom are clearly works in progress while the third prong of the RIL troika—the oil-to-chemicals business—continues to be the biggest cash generator. Which is why Ambani’s decision to sell a 20% stake in the flagship business without any premium over analysts’ valuation was a surprise. But Ambani, company insiders say, sees his investment cycle in the oil-to-chemicals cycle as complete. Even though RIL runs the world’s biggest refinery, Jamnagar, it is acknowledging the inevitable shift towards electric vehicles as early as in the next five years. Though the demand for fossil fuels will continue to grow in India, unlike in Europe where the decline has already begun, it is unlikely that RIL will put up another refinery, say in-house strategists. That said, the demand for plastics and other petrochemical products is expected to rise, especially in new areas like bio-plastics and specialised polymers. Says Rahool Pai Panandikar, managing director and partner at Boston Consulting Group: “The way to go will be to offer specialised products rather than commodity products in petrochemicals and Reliance has created the best market network to build that business in India.”

Since the biggest raw material for the refinery and, therefore, for downstream products, is crude, Ambani's deal with Aramco is expected to secure long-term crude supplies and also bring in a partner who is keen to expand its global footprint. Aramco recently issued its maiden initial public offer and is valued at $1.88 trillion, making it the most valuable company in the world. However, that deal seems to be taking time since, as this article was being written, Aramco was yet to start its due diligence process. Also, there are rumours that the oil major may be toying with the idea of buying state-owned Bharat Petroleum. If it does, it remains to be seen if it will have the appetite to invest in RIL too.

A deal which has concluded is that with the U.K.-based BP for its automotive and aviation fuel retailing business. The new network, expected to be operational by early 2020, will sport the Jio-BP brand. RIL will transfer the ownership of 1,400 retail outlets and 30 aviation fuel stations to the new joint venture. RIL will control 51% and the remaining will be held by BP. RIL, in August, said the 49% stake is valued at ₹7,000 crore. Then, neither the captain nor the ship have been rocked by the uncharted waters yet. However, there is the lingering question of how Ambani will monetise the new ideas without affecting the valuation of the flagship RIL.

Observers and analysts have proffered different models, the most obvious of which is that RIL would become a holding company with controlling stakes in all the businesses. This is a structure followed by several large groups like the Tatas and the Birlas. However, holding companies in India are answerable to the Reserve Bank of India. Also, they do not reflect the full valuation of the parts and usually trade at a 20%-25% discount relative to the sum of the parts. For example, shortly after the two Ambani brothers split in 2005, the combined valuation of their separate businesses was 50% more than the original whole.

The prospect of this may ruffle ordinary feathers. But Reliance isn’t most companies. And Ambani isn’t most leaders. Consider that if the Aramco deal materialises, Ambani will have realised a value of $75 billion for a business his father started with ₹500 in 1966. Over five decades later, rough estimates suggest Ambani has invested $60 billion in building his telecom and retail business. What that number could look like even a decade later is anybody’s guess.

This story was originally published in the January edition of the magazine.