The Rise of RelianceBy Charles Plowden. Autumn 2020
Market dominance, patience and deep pockets all point to a starring role for Reliance Industries in India’s consumer and telecoms revolution. Charles Plowden, Global Alpha investment manager, hails a firm whose ambitions match the vastness of the subcontinent
Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.
Amazon, Facebook, Google, Alibaba and Tencent are familiar to investors as being among the global internet winners. Global Alpha 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 Global Alpha 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.
Global Alpha 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.
The views expressed in this article are of Charles Plowden and should not be considered as advice or recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statement of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in November 2020 and has not been updated subsequently. It represents views held at a time of writing and may not reflect current thinking.
Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolios produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
The article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Act 68 of the Financial Services Act ('FinSA') and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise states.
The images used in this article are for illustrative purposes only.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ("FinIA"). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission. Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Charles Plowden Investment Manager
Charles Plowden is co-manager of Global Alpha and joint senior partner at Baillie Gifford. Charles is retiring next year, having served nearly 40 years with the firm.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.Makeover man: a fireside chat with Shiseido CEO Masahiko UotaniMasahiko Uotani, CEO of the Japanese cosmetics giant, discusses its profitable makeover with Iain Campbell.A Spotlight on Climate Change.Governance and Sustainability analysts Michelle O’Keeffe and Laura Thomson answer some of the most common climate change questions they are asked in relation to climate change and Baillie Gifford’s position regarding it.International Smaller Companies: Under the Radar.Part 6 - Alignment.