Mukesh Ambani – Captain of the behemoth for 20 years, and counting

Today (December 28), marks the completion of 20 years since Mukesh Dhirubhai Ambani (MDA) took over the reins of Reliance Industries Ltd, which under his leadership has grown multi-folds to become the first Indian company to reach a consolidated revenue of $100 billion.

With his uncanny ability to see far into the future, he has helped transform and grow the company from being predominantly a petrochemical and refining player into a well-diversified conglomerate with interests ranging from brick & mortar businesses to new age technology businesses and from being an India focussed company into an organization that now has its footprints in many countries.

Change in business composition

When MDA took over the reins of the company after the demise of his legendary father, late Dhirubhai Ambani, in 2002 the company was generating nearly 97 percent of its revenues from refining and petrochemicals business.

His first bold step was to a venture into telecom, which was seen as a large growth opportunity. It was clear telecom penetration was still very low and the runway for growth long. The transition from a business-to-business getting into a consumer-facing business was never meant to be easy, but Reliance continued to persist despite its early failures and several set-backs. MDA doggedly pursued the dream of becoming the numero- uno in the business. In 2020, that dream was finally realised with Jio becoming the number one telco by user base in India.

MDA didn’t stop with the telecom moonshot. With him, every time something big is achieved, there is something bigger in the making. Along with Jio, Reliance had already started building out its retail business, by far the biggest business opportunity in the country.

He recognised the job-creation potential and business opportunity catering to the day-to-day needs of every Indian, and bringing services near their doorstep. Therefore, in 2006, he founded Reliance Retail and launched grocery stores branded Reliance Fresh. Reliance Retail now encompasses consumer electronics, fashion and lifestyle, grocery and pharma segments.

Reliance Brands, which is a subsidiary of Reliance Retail, holds the exclusive rights to sell some of the world’s most iconic lifestyle brands such as Emporio Armani, Armani Exchange, Jimmy Choo, Brooks Brothers, Diesel, Gas, Superdry, Steve Madden, Salvatore Ferragamo and Replay. In 2019, it bought the ‘toy maker’, Hamleys, which is the oldest and largest toy company of the world; and in the same year, the group announced a partnership in 2019 with iconic US-based luxury jeweller Tiffany & Company to open a line of stores in India.

The conglomerate’s retail business is today the largest player in the segment in India, with gross revenues of close to Rs 2 trillion (net revenue ~Rs 1.75 trillion) as of March 2022, an EBITDA of ~Rs 12,000 crore and an EBITDA margin of over six percent. The business generated a net profit of Rs 7,055 crore for FY22 and has a total store count of more than 15,000 covering an area of more than 42 million square feet.

The retail vertical employs more than 3.5 lakh employees and has the distinction of being the second-fastest growing retailer in the world, according to Deloitte report from 2022.

In 2016, he re-entered telecom by offering mobile services through Reliance Jio Infocomm. With the aim of providing cheap and reliable voice and data services to all Indians, the company launched some innovative, ‘hard to ignore’ initiatives and captured a major chunk of telecom market.

MDA never wavered from the vision of becoming numero uno in the business. In 2020, Jio finally realised that vision, by becoming the number one telco by user base—420 million–in India and the third largest mobile network operator in the world.

The business generated gross revenues of ~Rs 96,000 crore (net revenue ~Rs 82,000 crore) as of March 2022 and an EBITDA of Rs 39,000 crore. The business has one of the best EBITDA margins in the industry at 48 percent and generated a net profit of ~Rs 15,500 crore in FY22.

Recently it also acquired the permissions to launch ‘5G’ services across all circles, the only company to achieve this.

While the telco and retail businesses are now firing well and could be becoming self-sustaining, the ambition is only growing. Organised retail has now become the second-largest business under its umbrella, contributing close to 22 percent of total revenues. The digital services businesses, which comprises of the connectivity business and digital platforms and comes under Jio Platforms, now generates close to 11 percent of its revenues.

Next leap

The next leap for the group is its ambition in creating a digital platform that could beat all past records because of the nature of digital businesses, where winner takes it all.

Among the group’s new businesses are also ventures into solar-energy production (the group has set up India’s largest and most advanced concentrated solar power (CSP) plant in Jaisalmer); and media (Network18 group) with partnerships with CNBC, MTV, CNN and Nickelodeon in India.

With the aim of touching the health and lives of people, MDA set up Reliance Lifesciences, which is the bio-technology initiative of the Reliance group and deals with opportunities in medical, plant and industrial biotechnology.

Even now, the oil-to-chemical (O2C) business remains the mainstay of the company; but its contribution to total revenue has come down to 59 percent. That the remaining 41 per cent is from new businesses created over the past two decades is no mean number for an enterprise whose group revenues is roughly Rs 7 trillion.

Business growth

During the 20-year period from 2002, the revenue of Reliance group has jumped from Rs 42,000 crore to a mind-boggling Rs 7 trillion as of March 2022, growing at compounded annual growth rate (CAGR) of 15 percent. The group’s net profit during the period beat revenue growth surging by an annualised 16.3 percent from Rs 3,200 crore to Rs 67,500 crore aided by the growth in both its core and new businesses.

Despite the group’s debt burgeoning to Rs 2.67 trillion in 2022 from Rs 19,000 crore in 2002, its ability to raise equity continually that too at fairly good valuations has ensured the group’s gearing has improved and is comfortably at a low level of 0.34 compared to 0.76 in 2002.

It is no surprise therefore that the stock continues to be a darling of the stock markets, delivering market-beating returns despite its size. Over the past 20 years since March 31, 2002, the stock has delivered a CAGR of 23.5 percent till March 2022 (stock price Rs 2,545). Currently, RIL quotes at Rs 2,537 and commands a market-cap of close to Rs 17 trillion.

While Reliance has been able to pull-off significant value creation opportunities every few years, one of the key challenges for Reliance will be to protect its mainstay O2C business for the long-term narrative because that piece makes it vulnerable to a continuous de-rating. MDA understands this well. He is already pushing aggressively the conglomerate towards green energy.

Net-zero carbon

In 2020, MDA set a new vision for the group and has set an ambitious target of achieving net-zero carbon by 2035. It intends to invest over $10 billion (Rs 75,000 crore) in building the most comprehensive ecosystem for New Energy and New Materials in India.

The company is intent on grabbing the pole position in green and renewable energy space. With that in mind, it has been investing heavily in a slew of companies, many of them start-ups, which are involved in developing advanced batteries, green hydrogen, clean mobility and so on.

“Hydrogen business has potential to become as valuable as present refining/petchem business over next 10 years, but its subject to success on bringing green hydrogen cost to $1/kg from present $4-6/kg”, Gagan Dixit, Senior Vice President, Elara Securities India told Moneycontrol. He estimates India’s Hydrogen (H2) demand potential could be at least 33 million tonne by CY50E, implying that the country would require 445GW electrolyser capacity by then and consequently, at least 30GW annual electrolyser manufacturing capacity by CY30E.

“Assuming that RIL will target 50 percent of H2 value chain manufacturing market in India, under the blue-sky scenario, it would require manufacturing capacities of 15GW for electrolyser, 50GW for solar PV and 60GWh for Battery Energy Storage Systems (BESS) which may add $172 billion to RIL’s EV by FY30E and $143 billion or Rs 1,663/share target equity value by FY30E”, Dixit added.

The scorching pace of growth of RIL under Dhirubhai made investors wonder if MDA would be able to match up to his father who with his first-generation entrepreneur’s fire in the belly not only created a wealth-creating machine but also the equity cult in India. MDA, despite the challenges of size could think beyond the oil and gas space to outdo that accomplishment on a higher scale. The strong cash flows from the mainstay business ensured that Reliance could make mistakes but recover from it and ultimately reach its goal.

With Reliance’s strong leadership in large business like telecom, retail – digital is yet to prove itself, but a success in digital will put it in an altogether new orbit — the cash register is likely to keep ringing for years to come. The challenge for Reliance going forward will to be ensure that it keeps the large annual cash flows allocated in a way it does not dilute its own track record of value creation.