Reliance Industries (RIL) – What is the Long term outlook on the Stock Price? Should you continue to hold it in your Portfolio?

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[Short term outlook for RIL is Bullish]

Reliance Industries and Ambani’s have been the best Value creators for Indian shareholders for a long period. Reliance Industries would be in the Portfolio of most Investors who have been in the markets for the past several decades. Since the past performance has been so phenomenal, very few shareholders even think of calculating the future Investment potential of the company. We believe Minority Investing is a non-emotional affair and each opportunity must be analyzed rationally on its merits. So is Reliance Industries a good stock to hold in a retail investor’s portfolio for the Long term?

As many would be aware RIL has big plans to invest in non-core business and that’s a big negative. Exxon, BP, Chevron or Total are totally focused on their core business and so are IBM, Apple, Dell, Toyota, BMW and Mercedes. Guess Mukesh bhai is cleverer than the combined management of all the stated companies!

It seems that RIL is less interested in pumping money into following which can directly/indirectly benefit his existing core business:
  1. Own core industry – Oil and Gas exploration, production and distribution.
  2. Highly undervalued own core industry candidates in public sector (PSU) and private sector.
  3. “Alternative Energy Industry” – such as Wind and Solar Power, which is the future for next several decades.
  4. Atomic power.
  5. Ancillary industries related to his core industry or company.
  6. Large CAPEX oriented electrical energy sector such as power.
  7. Leveraging its Project execution capabilities in complex Infra projects.
So, instead of focusing more on above, Mukeshbhai is extremely happy to pour money into following non-core business:
·    Hotel sector – non priority and non-related.
·    TV Media and Entertainment sector : non priority and unrelated 
·    Broadband and Telecom sector – non priority and unrelated.
·    Retail sector – non oil/gas based which is non priority and unrelated such as Reliance retail – such as selling vegetables and food grain.
·   Real Estate: Non priority and unrelated – except land for future projects relating to core business

One important thing about the diversifications to note is, Most of the capital is going into B2C (Business to Consumer) businesseswhere Reliance Industries doesn’t have a great track record. One of the first rules of Management is, “Play to your Strengths and not to your Weak Points“. The biggest strength of Reliance Industries has been its flawless project execution, managing regulatory environments well, raising capital opportunistically and building a strong B2B business. So, when capital is being invested in the weak areas – Investors ought to be concerned.

Reliance Industries also has a bad experience in the consumer business as they did not do well in telecom, gas retailing etc. Company’s culture probably doesn’t suit the needs of a B2C business like Innovative marketing, de-centralized decision making, Human Resources management etc. We also believe that in areas like Telecom which is a High profile bet for Mukeshji, it is going to be a losing battle clearly. When he was not able to win Airtel and Sunil Mittal, when it was young and fragile in 2000’s – How will he destabilize a company with over 30% market share, operations in over 20 Countries, Market Capitalization of around a Lakh Cr Rs and a very strong brand?

Mukeshji is planning to aggressively invest in Reliance Retail. He is targeting 5-6 times of existing revenue and achieves sales of Rs 40,000-50,000 crore and would turn profitable within this time period. Again, Retail is said to be a very Hands-on business and requires a street smart entrepreneur who has the pulse on the Indian consumer. It also requires nimble decision making at every level of operations – from a Store manager to a warehouse dealer. Reliance Industries is simply not made for it. Even now, decision making continues to be centralized. How much sales and how much profits will Reliance retail generate, only time will tell but costs sunk into the business are sunk forever.

Mukesh Ambani no doubt is a brilliant guy – he may well play with billions by investing in above non-core business and increase top line and bottom-line more than what he could do, had he invested the same amount in his core business. But all this is contingent on events happening well into the future – say beyond 3-4 years + down the line and that’s when investors and the junta at large will come to know whether the money was well spent or not!

Recently, Reliance Industries Ltd has declared its first quarter result for the year 2012-13 which shows a 21% decline in the Net profit and 13% increase in the quarterly sales of the company. Previous year in the same quarter Mukesh Ambani-led RIL’s Net profit was Rs 5,661 crore which decreased to Rs 4,473 crore this year. Whereas Sales increased to Rs 91,875 crore compared to last year’s Rs 81,081 crore. This is a third consecutive decline in RIL’s Net profit.

Gas output at KG-D6 basin which is one of the Reliance jewels has decreased 36% which is not only hurting its profit margin but also hurting investor’s sentiments badly. Also the Growth from its core businesses is slowing down. We believe that all the new businesses generate low ROE’s and hence over a period of time all the return ratios of the company would start decreasing which might lead to a strong de-rating in the company’s valuations.

RIL is sitting on a massive cash pile of Rs 70,252crore but company has no plans for the utilization of this huge cash which is making investors move away from Reliance’s share. We believe it is this problem of plenty which is forcing Mukesh to Diversify into various businesses (It’s actually Diworsify). The better way would be to pick up Global assets which would be very cheap currently or Invest more in related businesses in the country. In past 3 years stock price of Reliance has not increased rather it has given a negative return of 36%.

Before winding up, let us not forget that the most successful companies focus on core business – which is translates into developing core products or services. Even other successful conglomerates like Tata’s and Birla’s have used separate companies to pursue different business interests. Globally GE and Samsung are two companies which have done well extremely across Industries, there again – companies had a very strong culture to promote talent and good Management processes.

Isn’t it obvious and clear that Reliance Industries will continue to earn lower returns on capital invested (ROIC) over a period of time as most of it is getting drained over Non-Core businesses. Different Businesses with bad business economics will drain the precious capital earned from its high Quality Oil & Gas business. If that is the case, why should Non-institutional investors even look at the company?

Conclusion :Ok’s, let believe that – Just like previous instances while most people wrote-off Reliance Industries, Ambani does surprise everyone and reach his targets that he has set for the company. What does that mean? Nothing Great. Because he is basically targeting at doubling profits in 5 Years which means (14-15% PAT CAGR) which should not be exciting for a retail investor who has far more choices to earn higher returns without these uncertainties. So Reliance might be the classic case of, “Heads – I don’t win much but Tails – I lose a lot” which is very negative for a Shareholder!!

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