During these uncertain times, Reliance Jio has raised ₹67,194.75 crores from leading technology investors including Facebook, Silver Lake, Vista Equity Partners, and General Atlantic in less than 4 weeks. It valued it at
Equity value of Jio = ₹4.90 lakh crore
Enterprise value of Jio = ₹5.15 lakh crore
Current Market cap of Reliance (NSE:RELIANCE) = ₹9.8 lakh crore
These investments by Private Equity (PE) firms have made RIL one of the most buzzing stocks in Dalal street. When am writing this – Reliance’s share price is up more than 91% since its March 2020 lows. All of this on the back of the narrative that it is a tech or software company rather than a telecom or oil refining company.
Now, I am in no way doubting the quality of these PE firms as these firms employees some of the most academically intelligent men and women. What I am doing is raising some questions. Some serious questions.
Mukesh Ambani is one of the most successful & brilliant businessmen in the world. Probably you won’t even be able to name a company that entered a completely new industry and went on to dominate it in 4-5 years. That’s what Jio did to the telecom industry in India. But what helped Jio become this huge success? The answer is Ambani. More appropriately – Ambani’s 3 core competencies:
- Capital
Ambani’s ability & courage to put enormous capital into his ventures. RIL has the stomach to take enormous debts to undertake capital projects and make them successful. They keep doing it – from Jamnagar refinery to Reliance Retail and now Jio. Telecom industry needed capital to break the cartel of Airtel, Vodafone & Idea. The only way to do it was by infusing massive amount of capital and providing quality service at a cheaper price. And that’s what Ambani did. - Lobbying
Things get a bit sketchy here as there are a lot of allegations without substantial evidence but we all know Ambani has a magical ability to get laws & regulations in his own favor. Jio was no different. From the conversion of its ISP license to UASL to using Infotel as a front in the 4G spectrum auctions, RIL played all its cards right to ensure that the laws in general were favorable to Jio. Only the ISP to UASL conversion at ₹1-2k crores probably saved RIL tens of thousands of crores during spectrum auctions. - Execution
Ambani is brilliant with his execution. He knew that he won’t be able to play the game or infuse enough capital to win in all the networks, so he totally focused on 4G. This saved them a lot of money by avoiding running 2G and 3G networks. RIL then collaborated with Samsung as their sole equipment provider which probably provided some discounts too. But he knows he needs to save more for efficient execution so Reliance Jio acquired a US-based firm Radisys in 2018 for $67 million and has merged its subsidiary Rancore Technologies with itself to help in developing telecom equipment themselves.
Now his focus is on 5G and being ahead in that. The 5G spectrum band is between 3,300 MHz and 3,600 MHz. TRAI has recommended a base price of Rs 492 crore per MHz. That’s a minimum of ₹49,200 crores an operator needs right there. And guess what? How much Jio has raised? ₹67,194.75 crores.
But if we get to the reason behind these PE firms investing in Jio – they keep referring it as a next-generation software product and platform company. So RIL is now selling itself as a tech and services company i.e. the Jio Platforms. But does it make sense? Will Ambani’s 3 core competencies help him? Now, if you want to call Jio a tech or services company rather than a telecom company you will have two options:
- Recently launched Jio Mart
- And the Jio App ecosystem
Let’s start with Jio Mart.
If you look carefully, Facebook’s main reason for investment in Jio Platforms was Jio Mart. India is one the biggest markets for Whatsapp (owned by Facebook) with 400-500 million users and tying with Jio Mart will make e-commerce available to this 400-500 million Indians. Sadly it ends there.
Also, Jio Mart claims that it will connect the local sellers or retailers with customers online. Spoiler alert: Amazon does exactly the same thing in India. But e-commerce is not as simple as it looks, at least not in India. It is a complete mess. There are a lot of fake sellers online. When I say a lot, I mean it. So if you look closely at what Amazon India is doing – a lot of its products are sold by Cloudtail, Appario Retail, Amazon Retail and some combination of these 4-5 mega sellers. Every time you buy from these 4-5 mega sellers, you are actually buying from Amazon as it owns ~49% stake in most of them. Amazon has realized that decentralized e-commerce in India is very ineffective. A lot of seller fraud happens; so to avoid that Amazon eventually had to tie up with a bunch of blue-chip Indian companies and become a seller themselves.
Same thing happened with Flipkart. After they decided to go down the decentralized path, its WS Retail (A Flipkart owned mega-seller) lost its dominance in its own platform and product quality fell rapidly. Though I still hope Jio Mart will be able to figure out which both of these giants couldn’t.
Now, let’s apply Ambani’s 3 core competencies in Jio Mart:
- Capital
Good luck in competing with Amazon or Walmart’s enormous cash flow. Even both Jeff Bezos and Amazon shareholders are ok with giving up short term benefits for long term value. So you can easily expect Bezos to not back down at any cost – rather pump more capital to tap into one of the largest eCommerce markets in the world. So, the first competency won’t help Jio Mart. - Lobbying
Despite the recent changes in e-commerce regulations in India, both Amazon & Flipkart brilliantly managed and got past it. Though regulations can favor Jio as it is mostly owned by an Indian company, while the other two are largely owned by companies outside India. I personally don’t think that will be the case but it’s better to keep that in mind too. RIL could get the government to make life tough for Amazon and Flipkart. But as Cloudtail etc. are all proof, every law of government will be met with a creative workaround. And also on the other side, if Jio Mart goes through the decentralized path – they will be up against tons of small retailers whose collective political capital may trump RIL any day. So, I will keep this competency as non-conclusive as it is neither against or in favour of Jio as of current situation. - Execution
Amazon and Flipkart have already spent years bringing down their delivery & packaging costs. But the Reliance Retail segment could help Jio in faster delivery as they have quite a network of their stores across India (Keeping in mind they won’t go through the decentralized path). So this competency is in favour of Jio.
Out of the 3:
1st won’t help
2nd can’t be concluded
3rd will help
That’s a pretty tough situation, to be honest.
Now, lets come to the 2nd option – Jio App ecosystem
This could actually make Jio a tech, software or services company. But as far as I know, none of the Jio apps makes much money despite having millions of downloads. To be honest, in my own network I don’t know anyone who uses or sent me a message in Jio Chat or paid me thorough Jio Pay. Personally, I use none of them. But I do know quite a few people who use Jio TV but an interesting point to be noted – none of them pays to watch content on it. Indians generally prefer free stuff and when you can watch most of the shows or music through YouTube for free – it will be hard for Jio to make people pay for it. And it isn’t just free YouTube, in the paid video service segment they are up against companies like Netflix, Hotstar etc. who have championed their own content creation.
And, coming to the “software company” part – I don’t think Jio is anywhere close to that. Tech is more about culture and less about the company.
Now again, let’s apply Ambani’s 3 core competencies in Jio App ecosystem:
- Capital
We all have to accept – you just can’t compete with Google or Facebook’s cash flow – unless you have a new innovative product, which I don’t find in any Jio apps. So, the first competency will definitely not help the Jio app ecosystem. - Lobbying
You can’t make Whatsapp illegal or ban Google Pay. So definitely in this case lobbying won’t help. - Execution
All of the Jio apps currently in the market are up against tech companies who have spent decades perfecting their execution. Let me remind you – PhonePe was launched earlier than Google Pay, yet both have the same market share in Indian. You actually need to have a culture where everyone right from the coder to the product manager thinks along the same lines, which these tech companies have mastered in. And definitely RIL currently doesn’t have any of those qualities.
So this time, out of the 3 competencies – none favours Jio.
Finally going back to the point where we started, is Reliance (NSE:RELIANCE) ridiculously overvalued?
The answer is yes if you are buying the stock depending on it’s supposed tech abilities.
If you see their current revenue breakup, only ~2% comes from digital services. So if you are buying Reliance because of its refining & telecom abilities – good luck; but if you are buying it because of its tech abilities – think again.
I hope I am totally wrong here and there are some things that I am missing or are purposefully hidden by Mr. Ambani as a strategic advantage for the long term value creation of the company. But whatever happens, I will always cheer for Mr. Mukesh Ambani. During the worst health crisis of modern times, he has managed to bring down a significant amount of his company’s debt. Also, don’t forget his massive disruption of the telecom industry.
And please don’t take this as investment advice; I am in no way a certified investment advisor. This is just a one to one talk about my thoughts on Reliance Industries.
As always, never forget our life mantra: Save Invest Repeat. And do let me know if you own or thinking to buy Reliance shares. Talk to you on Twitter – @InvestRepeat. Also, you can join my private Telegram channel (Username: InvestRepeat).
Your man,
SIR
