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Mukesh Ambani's aim to more than double RIL's size looks achievable

Vishal Chhabria/ 11 Jul 18 | 12:27 AM

Mukesh Ambani , RIL AGM

Last Thursday, Reliance Industries' chairman Mukesh Ambani exuded confidence that the company will more than double in the next seven years.

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At the company's annual general meeting of shareholders, Ambani said, "As India starts on its high growth journey to double the size of its economy by 2025, I assure you that the size of Reliance will more than double in the same period."

For the man who was responsible to build the company's largest refining complex at Jamnagar, Gujarat (also the single largest in the world), has led RIL to become India's second most valuable firm, and knows the company way better than anybody else knows, he would certainly have done his calculations before making such a statement.

While the doubling of revenue in seven years would mean that RIL would have to grow at a compounded annual rate (CAGR) of 10.4 per cent, a look at the company's past performance also provides interesting insights, and why Ambani may well be right.

For instance, plotting the company's sales (revenue or turnover) and crude oil prices (average for the fiscal) shows that the two are strongly co-related (see adjoining charts). In the past 15-odd years, during FY2002 and FY12-13 when global crude oil prices were on an uptrend, RIL's net sales too consistently moved up from Rs 421 billion in FY2002 to Rs 4,345 billion in FY14. And, as oil prices fell thereafter through FY16, RIL's net sales also fell—down 37 per cent over two years to Rs 2,740 billion in FY16. Of course, expansion of capacities and change in product mix, which RIL has undertaking over these years, would have also influenced the company's topline as it has in recent times. With oil prices moving up in the past two years after hitting multi-year lows in 2016, the company too has benefited in the form of increase in revenues. The expanded capacities and product mix, however has ensured that RIL’s net profit has consistently kept moving up in the past 15-16 years, except for two occasions.

In this context, and with oil prices estimated to move up further—with some industry experts projecting at over $100 a barrel from $75-77 levels currently, there is little doubt why RIL would not benefit in the form of a rise in its turnover. Even assuming a value of $100 for oil, RIL's topline should benefit to the tune of 33 per cent only from the inflation in oil prices, should the estimates turn out to be true.

Looking at the past numbers of RIL to see how much time the company has taken to double revenues also suggests that Ambani has done his calculations. In a bid to find out how many years (approximately) RIL has taken to double its revenues in the past, we compared its annual revenue trend for over 15 years. Between FY2006 and FY2014, RIL took between 3-4 years to double its revenue. This was the period when crude oil prices were also on an uptrend. But as oil prices started falling post FY14, it took longer for RIL to double its turnover – the figure increase to six years in FY2015, and to eight years thereafter. This trend, however, is likely to reverse with RIL taking lesser time to double its turnover as oil prices are rising. Moreover, the mega multi-billion dollar capital expenditure undertaken to push up its refining and petrochemicals capacities is also behind now, and is already reaping dividends in the form of higher revenues and profits. Its investment of over Rs 2.5 trillion in the telecom business is also providing new revenue streams, and significant profits are not far behind. In a July 6th report post RIL’s AGM, analysts at Kotak Institutional Equities have estimated the company’s telecom business net profit to grow from Rs 7 billion in FY18 to Rs 284 billion in FY25 (or almost 80 per cent of the company’s consolidated profit of Rs 360 billion for FY18). During this period, telecom revenues are estimated to rise from Rs 202 billion in FY18 to Rs 1,045 billion in FY25 (or about 27 per cent of RIL’s consolidated FY18 revenue of Rs 3,917 billion).

The other significant consumer business of retail is also growing at a healthy pace. So, put together, there is little doubt why RIL should not be able to more than double its turnover by 2025.

The most important question that any shareholder or investor would put up is how will RIL’s market value move in this context.

Plotting data with respect to the company’s net profit and market capitalisation throws up some interesting insights. Barring a few years, especially during FY12-FY15 when profit trend was flat to marginal, RIL’s market value has replicated the trend in its net profit. The co-relation between these two parameters has been pretty strong. The past 5-6 years trend also shows that RIL has taken 7-8 years to double profits.

In a June 10th report, analysts at Morgan Stanley have estimated RIL’s consolidated net profit to grow from Rs 361 billion to Rs 623 billion by FY2021. By FY2025, these figures should be much higher given that Ambani is aiming for RIL deriving a good chunk of its earnings from the consumer (telecom, retail, etc) businesses too.

In his AGM speech, Ambani said, “The consumer businesses – Jio and Retail – represented about 13 per cent of the consolidated EBIDTA, up from a mere 2 per cent last year (FY17). This increase is especially remarkable because it is taking place at a time when the hydrocarbon businesses are growing rapidly."

“I can tell you with confidence that Reliance has reached an inflection point. As the Golden Decade rolls on (RIL approaches its 50th year post its IPO), our consumer businesses will contribute nearly as much to the overall earnings of the company as our energy and petrochemical businesses," he added.

In the context of the measures RIL has taken to grow its core business of petrochemicals and refining, the telecom business profitability at an inflection point and retail too expected to post healthy improvement, there are reasons for its shareholders too to feel excited.


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