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This article originally featured in Baillie Gifford’s Autumn 2020 issue of Trust magazine.
Amazon, Facebook, Google, Alibaba and Tencent are familiar to investors as being among the global internet winners. Monks believes that in years to come Reliance Industries (Reliance), or perhaps its subsidiary Jio, will be added to this list. Reliance is already India’s most valuable company. Mukesh Ambani, its chairman and largest shareholder – also India’s richest man – intends to take it much further.
Reliance traces its roots back to the 1960s and textiles when Mukesh’s father, Dhirubhai Ambani, co-founded Reliance Commercial Corporation. From there it entered the petrochemical industry in a series of ever bolder ‘backwards integrations’ which now see it operating the world’s largest and most modern oil refinery. But this isn’t where the group’s future lies. Indeed, it is in late stage discussions to sell a 20 per cent stake in its refinery business to Saudi Aramco for $15bn. The future of the group, and the reason Monks invested, is its consumer businesses, centred around its telecoms company Jio.
The drive to digitalise India at lightning speed is bringing opportunity and choice to millions
Since 2015, in a move bolder than anything seen in any developed market, Jio has invested about $40bn building the largest digital network in India and then offering it at very low prices to consumers across the country. Voice calls are effectively free and data bundles are very cheap, so much so that the average monthly cost per user is under $2. In just four years Jio has gained 388m subscribers, over a third of the entire Indian market. In doing so it has driven incumbent mobile competitors into deep losses. Jio is on track to reach 500m subscribers, more than half of the working population, and once it has them it will start to offer a full range of digital services on top, from ecommerce and payments, through media and entertainment, to education and telemedicine.
This ‘land and expand’ model requires deep pockets and enormous confidence, both of which Mr Ambani has in abundance. The drive to digitalise India at lightning speed is bringing opportunity and choice to millions. Little wonder it has the support of the government. For competitors it is a whole different story, as this sort of scale gives Jio enormous advantages, making it the partner of choice for any number of participants.
The services it is providing are undoubtedly helpful to the many millions of small shops (known as kiranas) across the country
Earlier this year, Reliance announced that a range of international groups were investing directly in Jio, led by Facebook, which has taken a 10 per cent stake. Together these new investors have acquired just under 25 per cent of Jio for a total of $15bn.
India is one of the biggest prizes for international consumer and technology companies seeking to expand beyond North America and Europe. It is the front line in the war for global supremacy alongside China. Amazon and Walmart have both announced significant investments in India in recent years and the credit card companies Mastercard and Visa are also engaged in a battle for market leadership. But everywhere you look Reliance, through Jio and its retail businesses, is in pole position. It’s either set to win outright or to be the local partner of choice. For example, Jio is Microsoft’s exclusive partner to provide the Azure cloud computing platform in India and has signed a strategic partnership with Facebook’s WhatsApp. In a country notorious for favouring local champions over international entrants, Reliance is the kingmaker.
Its other major division is Reliance Retail. This is already India’s largest ‘organised’ retailer with leading positions in consumer electronics, grocery and fashion. But 90 per cent of India’s retail offering comes from the ‘unorganised’ or independent sector. Reliance is again carefully positioning itself as the national champion, this time forming partnerships through its JioMart subsidiary with local shopkeepers. It is digitising their shops and stalls by installing electronic point of sale (EPOS) terminals and connecting the country’s stores through a nationwide network. The services it is providing are undoubtedly helpful to the many millions of small shops (known as kiranas) across the country, but the biggest winner is likely to be Reliance itself. This is not only because it accelerates the development of end-to-end ecommerce, but also because of the increasingly valuable data it will generate. For example, Unilever is already paying Reliance for data on consumer sales, to help it optimise products and pricing, while Reliance itself will be well-placed to provide business loans and finance to the strongest retailers.
Monks is excited by Reliance’s pivot from petrochemicals to the consumer and digital economy. It’s a bold move, clearly in line with both societal demands and commercial opportunities. But it is the scale of the ambition which is most impressive: Reliance is putting itself in pole position to dominate a market which, with more than a billion consumers of whom 600m have access to the internet, is second only to China in scale.
Reliance plans to develop an ecosystem offering multiple services, each with many billions of dollars in potential revenue, of which the largest elements are ecommerce, payments, media content and advertising. The opportunity more closely resembles that of matching Tencent and Alibaba’s dominance in China than anything achieved by the western technology giants, each of which has a more limited range of services. WhatsApp seems likely to become the platform for many of these services, building on its existing 400m users in India.
The major investment risk for Reliance in recent years has been the high debt levels taken on as part of its $70bn capital investment programme. But management has responded through a blizzard of asset sales and partial business disposals. With $15bn coming in from Jio investors, $15bn expected from Saudi Aramco and a $7bn ongoing rights issue, Reliance is addressing debt concerns and could even move into a net cash position by the end of the year. This makes it easier to assess the group purely on the growth potential of its operations. We believe that Reliance, with a market value of $187bn at the end of July 2020, can justifiably begin to close the gap with its increasingly relevant peer group of Alibaba ($679bn), Facebook ($723bn) and Amazon ($1,585bn).
We’ll be hearing a lot more about Mukesh Ambani, Reliance and Jio in the years to come.
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Charles Plowden is manager of the Monks Investment Trust and joint senior partner at Baillie Gifford. Charles is retiring next year, having served nearly 40 years with the firm.