RIL : Growth assured if you can play the waiting game

THE market’s expectations from Reliance Industries’ (RIL) annual general meeting (AGM) may have been pitched too high — as was evident from the 1.5% fall in RIL’s share price on Friday — although the chairman’s speech gave cues about the company’s future course of action. RIL, which until a few months ago appeared lacking sufficient investment avenues to utilise its strong and growing cash flows, suddenly seems to have its plate full.
However, most of these new initiatives are capitalintensive with long-gestation periods, which means investor wealth is not likely to grow in a hurry. Indeed Mukesh Ambani hinted that RIL’s future growth could be slower than India’s GDP.
“I feel hopeful and confident that Reliance can accomplish value creation of a similar magnitude in less than a decade,” said Mukesh, referring to the $80 billion of enterprise value RIL created in the past three decades. But his take on India’s GDP that reached $1 trillion after six decades was more bullish. “Our country is all set to reach the next trillionmark in less than a decade — indeed, within the next five years,” he said.
Doubling of enterprise value — a measure of the company’s value that is roughly defined as market capitalisation plus debt minus cash — within a decade, which translates into a cumulative annualised growth of 7.2%, is hardly exciting for RIL. The company’s market capitalisation grew at a CAGR of 26% in the past decade.
Apart from its commitment to growing the refining and petrochemicals business, the company unveiled plans to enter two new areas — telecom and power. In the telecom segment, the company has entered the broadband wireless access (BWA) or highspeed wireless data services space, thereby avoiding the crowded market for voice services. The phenomenal growth in the country’s telecom industry over the past decade has been predominantly fuelled by voice services, while broadband penetration is still under 1%.
This hints at huge growth potential. However, both initial investment and the waiting period for returns could be equally huge, until the industry reaches its inflexion point.
The power industry is, again, a similar story in terms of the waiting period. A big thermal power plant could easily take 2.5-3 years to build from zero date. A substantial time is also spent on bidding, government approvals and land acquisitions, which means that one should not expect any noticeable revenue for RIL under this head for the next five years.
In the organised retailing space, too, the company is losing money even after four years of operations, although the quantum of losses is shrinking. In FY11, the company could break-even in this venture. But when it comes to making any real addition to the company’s bottomline, it’s still a few years away.
The company’s initiatives in bolstering its position in the petrochemicals and polymer industry, making its refineries ‘bottomless’ and its focus on global E&P business — particularly shale gas in the US — are likely to generate great value in the long run.
Although one may discard Mukesh’s views on RIL’s growth for the next decade as prudent conservatism, investors need to be careful. The company’s strong balance sheet and an array of growth avenues certainly make it an attractive investment for every portfolio. However, the company, currently valued at Rs 3,45,000 crore, is trading at a price-to-earnings multiple of 21 — higher than that of the BSE Sensex — which can hardly be called a bargain. Long-term investors should buy this stock only on dips, if they wish to earn higher than market returns.