On the day when Reliance’s market capitalization crossed $150 billion, it emerged as the 57th most valuable company in the world. Of course, Reliance is a long way off compared to Saudi Aramco at $1.75 trillion or Apple at $1.45 trillion. However, RIL is already the most valuable company in Indian history. How did Reliance get to the coveted $150 billion mark?
A long journey since the 1977 Reliance IPO
The table below captures the wealth creation by Reliance Industries of Rs10,000 investment in the Reliance IPO in 1977.
Rs10,000 in IPO
Grew to Rs78 lakhs
Grew to Rs1.05cr
Grew to Rs2.25cr
An investment of Rs10,000 in Reliance IPO in 1977 would be worth Rs2.25cr in 2020. That is CAGR returns of 19.69% over last 43 years. This is excluding dividends which could add another 1.5% to the overall annualized returns taking it above 21% annualized. Since 2005, when Reliance was split between the brothers, the RIL stock is up 6 times, translating into 13.3% CAGR. The stock is up four-fold since late 2016 when Jio was launched. From the lows of March 2020, RIL has doubled after it announced a slew of Jio Platformsmonetization.
Looking back at the last 43 years, there have been 3 major events or decisions that shaped RIL in its journey towards a $150 billion entity.
1. Backward integration and the quest for scale
If there is one thing that defined the journey of Reliance through the 1980s and 1990s, it was the big focus on scale. Think Big; was a motto that was not only preached but also practiced at Reliance. Consider some of these achievements. In the 1980s, Reliance executed the ambitious petrochemical plant at Patalganga in a record 18 months. The Hazira plant in 1991 set the tone for RIL to become the world’s largest integrated producer of polyester. Later in 2000, Reliance commissioned the largest integrated refinery at Jamnagar in a record 36 months.
Why were these developments significant? Firstly, Reliance set the tone for other Indian companies to look at scale in the global sense. What we saw with Tata Motors, Tata Steel, Bharti Airtel and Hindalco in 2007 was a journey of scale that began with Reliance. Secondly, the scale and the backward integration allowed Reliance the capacity to supply at unmatched costs. The refining business became a cash cow for Reliance group only because its product mix ensured gross refining margins (GRM) much higher than the Singapore GRM. Scale and backward integration also explains why RIL could sustain healthy margins in petchem. This laid the foundations of the RIL of today.
2. Splitting the group and focus on hydrocarbons
In 2005, the Reliance group was split between the two brothers. While the ADAG group got power, telecom and financial services; the MDAG group retained the core hydrocarbons business. In a way, it proved to be an advantage for the MDAG group as most of the business they had to exit went into a serious downtrend. The bet on CDMA technology was not scalable once the world shifted to smart phones and digital. The power business ran into problems due to the governments wavering on power purchase agreements (PPAs). Infrastructure projects continued to reel under low IRR and challenges in land acquisition and environment regulations.
How RIL market cap grew post the split in 2005?
Reliance Industries, on the other hand, benefited from the oil price rally that lasted all the way to 2014. Even though oil prices crashed post 2014 due to the shale glut, Reliance could hold GRMs at a premium to the Singapore benchmark. But, the quest for the new oil!
3. Jio and the big digital push from 2016 onwards
Back in 2012, Mukesh Ambani had a major problem on hand. His refining and petchem businesses were doing extremely well but there was no way to profitably use the cash generated. Cash cows cannot generate market value and that was evident in the price. The digital push consisting of Jio and the digital ecosystem began around 2013 and was marked by the launch of Jio mobile services in late 2016.
How Jio was monetized in 8 weeks flat?
Over the last four years, Jio has emerged as the largest telecom player in terms of subscribers and the industry is down to just 3 players post the consolidation. The bigger story is how RIL is trying to weave digital into their future. Reliance group may have invested Rs3 trillion in the digital business but the market cap accretion in the last 4 years is more than Rs7 trillion. Out of the $150 billion valuation that RIL commands, $65 billion can be attributed to Jio Platforms alone. This is based on the valuation assigned by some of the largest PE funds above and is indicative of the potential that RIL sees in new oil.
The journey of RIL over last 43 years has been characterized by 2 stand-out features. The ability to think and execute big has been backed by the courage to invest in future trends. That perhaps, best sums up the journey of RIL since 1977.