As much of the mayhem is over, the markets remain fearful that the next show to drop would be some states/countries going belly up. Perhaps they are right. Either way, what is clear is that if you invest for the long haul and focus on a part of your portfolio on growth opportunities in the developing world, you will likely do well.
India’s largest corporation, Reliance Industries Limited (RIL) represents a great opportunity for a diversified play on one of the larger BRIC opportunities. And for non Indian investors, RIL stock is available as a GDR in London, UK.
Core Business:
RIL, started off in the polyester space and has undergone a massive backward integration. They own the worlds largest petro-chemical complex in the Western state of Gujarat in India. The immediate growth are for Reliance is the monetization of the D6 natural gas deposits in the Krishna Godavari (KG) basin off India’s eastern coast.
RIL is a bit pricey at a PE of 21 http://www.business-standard.com/stockpage/stock_details.php?bs_code=1331 so if may want to wait for the right opportunity. However, this is a business that has a net margin in the high teens (fluctuating with refining margins for now, until the gas production from D6 is ramped up) and has many things on the go for it - http://www.business-standard.com/india/markets/dataresult.php?leftnm=0&subLeft=7&selcat=1&subCnt=1&selsubcat=Quarterly%20Results&txtSearch=&topsub=&ToShow=Data&BSCODE=1331&Type=61
What does the future hold for Reliance:
1. More Upstream & Downstream activities in the energy exploration sector in India
Upstream
The D6 find, the petroleum finds by Cairn India, additional finds by reliance on the West cost of India in Gujarat all show signs that many of the under explored blocks in India hold reasonable potential of additional oil and gas finds.
The D6 oil find as an example, is just 1 of many blocks that Reliance owns amongst others in the vicinity http://www.energy-pedia.com/article.aspx?articleid=138085 and even D6 has not been fully explored.
Downstream
RIL had a chain of gas stations (900 company owned and 500 franchise owned http://in.reuters.com/article/idINIndia-44200920091124?feedType=RSSfeedName=businessNewsutmsource=feedburnerutmmedium=feedutmcampaign=Feed3Areuters2FINbusinessNews28News2FIN2FBusinessNews29) across India that were shut some time ago as gasoline (petrol) was sold at subsidized rates in India. Many of them re-opened late 2009.
The government of India on June 24, 2010 however has decided to end those subsidies and move to a market driven mechanism for the pricing of gasoline - http://online.wsj.com/article/SB10001424052748703615104575328281829586188.html
This along with eventual decontrol of diesel prices at an undetermined date should allow RIL owed gas stations to make a comeback across the country at retail level.
2. A clean break in the Ambani versus Ambani dispute
For a few years now, the two sons of the late founder Mukesh Ambani (RIL) and Anil Ambani (non RIL assets and businesses) had been sparring in India’s courts about allocation of natural gas at a preferential rate for the younger brother. As part of a non-compete the elder brother Mukesh was restricted from having RIL enter some key areas of business like telecom, power etc. These are business areas where the younger brother Anil operates in.
The non compete was scrapped in May and RIL is now free to operate in any business sphere it wishes to. http://www.reuters.com/article/idUSTRE64M13D20100523
3. Reliance Infotel
India recently concluded its auction for 3 spectrum and RIL has come in and bought 95% of Infotel. Infotel was the only company win spectrum in all 22 service areas in India - http://news.bbc.co.uk/2/hi/business/10296831.stm
The billion dollar price tag is easily affordable given that the D6 natrual gas find is projected to spin off billions each year - http://www.thehindubusinessline.com/2009/04/03/stories/2009040351930200.htm
India has been adding 20 million or so cell phone subscribers each year and the cell phone towers can barely keep pace. RIL executives were part of setting up Reliance Infocom, the wireless company owned by the younger brother Anil so this is not an alien space for them. Moodys however, does rate this venture a bit risky, so you should do your own homework - http://www.businessweek.com/news/2010-06-21/reliance-industries-risk-rises-on-telecom-unit-says-moody-s.html
4. Reliance Retail
For those of you who have not lived or been to India, it may come as a surprise that the retail distribution in India is massively fragmented. Inefficient, mom and pop stores are encouraged and efficient chains are constrained as they are seen as evil corporations devouring the livelihood of the self employed.
Despite that Walmart has made a play for India through a joint venture with another Indian company (unlisted) and as middle class aspirations change, it is natural the people wish to shop in a better ambience.
Reliance Retail, India’s largest grocery chain (1,150 stores and 5.5 million loyalty members) is closing in on $1 billion in sales and the company hopes to grow 10 fold over the next 5 years - http://www.theaustralian.com.au/business/in-depth/ambani-flags-bigger-retail-role-at-reliance/story-e6frgaho-1225882724159
Reliance has multiple formats of organized retail being tested in India for a variety of verticals apart from groceries.
5. Reliance & Shale gas play in the US
If you believe in the future of shale gas in the US, then that’s another reason why you should think of Reliance. Reliance has closed two shale gas deals in the US this year - 45% stake in Texas, US-based Pioneer Natural Resources Co. for $1.32 billion in June and In April, RIL took a 40% stake in Atlas Energy Inc.’s core Marcellus shale acreage position in the US for $1.7billion.
Apart from just access to the promising acreage RIL is also intent on learning new gas extraction technologies - http://www.livemint.com/2010/06/24103938/RIL-acquires-Pioneer-stake-for.html
6. Reliance & SEZs
Reliance has two very big SEZ (Special Economic Zone) projects that have been hanging fire for some time. The two projects (MahaMumbai and Haryana SEZ). With the real estate boom having abated in India, many players have chosen to hand back the land they acquired to the government. Land acquisition is very touchy subject with farming communities and the 2 SEZs (if the come to fruition) could be a game changer for RIL.
The Haryana SEZ (close to New Delhi) is showing some sings of life with reports of a possible Japanese partner picking up equity http://birlaa.com/2010/04/12/mitsui-in-reliance-sez-haryana/
The Raigad SEZ (close to Mumbai) is the second mega SEZ that RIL is pushing for but the Supreme Court has ruled against speeding up land acquisition and the farmers have voted overwhelmingly against selling their land and do not wish the state to acquire their land either - http://timesofindia.indiatimes.com/city/mumbai/CM-to-decide-fate-of-SEZ-in-Raigad/articleshow/5241174.cms
7. Reliance IMG
RIL has also singed an agreement with IMG, the global sports marketing conglomerate to develop pro-sports leagues in India. If you do not follow the business of sports, you may not be aware that a cricket league in India has gone from zero to USD 4 billion in 3 years http://www.business-standard.com/india/news/ipl-brand-value-doubles-to-413-bn-brand-finance/89167/on
IMG manages the execution of the IPL and have made a couple of forays in India earlier so they are familiar with the landscape.
Mukesh Ambani personally owns the Mumbai franchise in the cricket league (IPL-Indian Premier League) and clearly sees how the young population of India can be hooked on to sports other than cricket. As part of that Reliance-IMG has assigned 30 year deal with the Basketball Federation of India (BFI).
With no indoor stadiums or pro-league in basketball, it will take a lot of time and investment before a serious replication of the IPL can be attempted, but long term, for a country where almost half the population is less than 30 years of age, pro sports leagues does seem like the place to be. http://www.imgworld.com/press_room/fullstory.sps?iType=13708&iNewsid=6650053&iCategoryID=
8. Stock Split
Late last year (October, 2009) RIL stock was split (1:1) http://www.ril.com/downloads/pdf/PR07102009.pdf
RIL has a history of stock splits to reward its investors. The founder (father of Mukesh and Anil) Dhirubhai Ambani, was the catalyst in many ways in developing the equity culture in India and he always rewarded the retail investor.
With all of the above projects having long gestation period and RIL having the free cash flow to fund the capex, I strongly recommend buying and holding this stock for the long haul (until the next stock split).
9. Additional Expansion
RIL has aggressive plans to enter the power (electricity) generation http://www.businessweek.com/news/2010-06-18/reliance-industries-ready-for-big-surge-forward-update1-.html and chemical products http://www.expressindia.com/latest-news/RIL-mulls--9-bn-investment/635634/
Recommendation
India, a market of 1 billion plus people is chronically energy starved. The state has finally realized this and they have planned for what they call UMPP (Ultra Mega power Project, I believe). These mega power projects are supposed to be granted expeditious approvals (although it might still take a couple of years). So far IL was locked out of the bidding due to the non-compete with Anil Ambani. But now with that gone, RIL is once again a 21st century growth stock India play.
For those of you who are wary of investing in bloated conglomerates, I hear you. However, I would urge you to think of RIL like a mutual fund and take the great with the not so great business results that may lie in store for its business units.
Pricing information on the RIL GDR is available at http://www.lse.co.uk/shareprice.asp?shareprice=RIGD&share=reliance_industries_ld_gdr_(each_repr_2_ord_inr10_level1)(144a)
Friday, June 25, 2010
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