Reliance Industries today said that it had become net debt free after having raised a little over Rs 1.68 lakh crore through stake sales in its technology arm Jio Platforms, as well through a rights offering in the flagship company.

RIL's capex for this year may be lower, but it has already invested tens of billions of dollars, across businesses including in the upstream oil and gas space to have a significant growth from the existing investments, Jal Irani, Senior VP, Edelweiss Financial Services said in an interview with CNBC-TV18.

Irani said there was potential for value creation through acquisitions as well. "These acquisitions could be across the spectrum, not only in the potential retail space and I would not be surprised if it is also in the refining and the petrochemical space because actually the deep value that you are getting in the traditional business if you ask me, that is a business which is most understood by the company today.," Irani said.

Edited excerpts from the interview:

Q: Just a quick comment in terms of the official acknowledgment that Reliance Industries (RIL) is now net debt free and then we can look ahead in terms of what next for RIL.

A: I think firstly it is very commendable that Reliance has raised in the order of Rs 1,60,000 plus crore, in fact Rs 1,75,000 crore in a very short period of time. They have done it in a very sensible way; they did not do it out of desperation. When the stock price fell to Rs 850, they did not raise it at those levels and yet they have left enough value on the table for shareholders to make value as well. Also, they did get a partner like Facebook in first before doing the rest the raisings. So, I think it is very commendable to start with.

Going forward, I think Reliance is now in a position having a strong balance sheet to be able to leverage that across businesses. While its capex is in my opinion poised to halve from about Rs 1 lakh crore in FY19 to about Rs 45,000-46,000 crore in this year, it has already invested tens of billions of dollars, close to about USD 50 billion, across businesses including in the upstream oil and gas space to have a significant growth from the existing investments and plenty of growth opportunity in the space.

When I speak to investors, what both domestic and international investors particularly like is that Reliance is one of the few companies which is relatively safe because especially in these troubled times it has got a strong balance sheet and yet it has got potentially strong growth opportunities as well which is very unique.

Q: How this would translate to RIL shareholders’ value? There would be listing (of Jio) at some point, but how do you think about valuations? These are private market valuations, so would a public market listing command higher valuations? We can go by history in terms of what has happened to other very large entities in the space who have raised large amounts of money but private market valuations versus public – your thoughts.

A: Let me answer this slightly differently. Let me go back into history about 3 years back -- interestingly when Reliance was rolling out Jio and in the early days when it launched it, actually investors were so pessimistic that they used to give a 50 percent discount to enterprise value. In fact, not only the equity value was zero, it was negative and they used to value in a 25 percent debt write off on the Jio business.

Now, clearly Reliance and Jio, in the minds of investors have come a long way and the critical factor which has swung the needle is immaculate execution. So, therefore now from effectively a negative value investors attributing, now we have got substantial values of USD 60 billion on what the strategic investors are and private equity investors are valuing this in. So, obviously now it is not dirt cheap to that extent.

Essentially the potential market opportunity ahead is very significant. So, even if you look at it from a digital perspective, with the associated services, whether it is fibre to home, internet of things, monetization of various apps, that is an extremely large market and we have seen it in several other markets whether it is the US, whether it is Japan or whether it is China that the companies there can get very large. Therefore in India, especially there is little or no competition, and therefore the field is open.

Similarly, on the retail side, today what is being captured is or what is being targeted is really only about a USD 100 billion organized market. There is a trillion-dollar plus unorganized retail market which is there for the taking. Reliance has put the correct pillars in place including – it has wired up the entire country, it has got covered 99 percent in terms of the fibre rollout reach and it has got even on the retail side logistics which is unparalleled, not just the front end and now it has got the Facebook tie-up. So, effectively it has got a little less than a billion customers that it can reach out to. So, it has got all the pillars in place.

But the critical thing again is going to come down to execution. So far they have been good on execution and that has been the hallmark of Reliance since several decades back. However, that is something we will have to watch out closely and that is going to be the differentiating factor how much value driven, and not just the listing of the IPO. It is really the execution that will decide the value, not just the listing of an IPO.

Q: The value from here on, the so-called concept of value unlocking, do you believe that Reliance is anywhere close to this stage of all these 3 businesses, there is a traditional business, there is Jio Platforms and there is retail, where is it in the journey of all 3 businesses having enough independent critical mass to think of any kind of further value unlocking for stakeholders.

A: One value unlocking may come through further through for example the Aramco sale that they have been talking about of the refining and petrochemical business. So, those are further obvious value unlocking and value accretion through immaculate execution and grabbing the opportunity. But I think there is a potential of value creation through acquisitions as well.

These acquisitions could be across the spectrum, not only on the potential retail space and you would have seen potentially some press reports on the back of that, but I would not be surprised if it is also in the refining and the petrochemical space because actually the deep value that you are getting in the traditional business if you ask me, that is a business which is most understood by the company today. That is actually in fact the lowest risk and the synergies to be drawn on the potential acquisitions are the greatest.

So, despite public posturing that the focus would be consumer-based businesses going forward, I do not believe that Reliance is going to neglect their cash cow which is the refining and petrochemical space. I would not be surprised if there is some meaningful potential there. I cannot say I know of any at the moment and I would hate to speculate on any names, just preempting any question that you may ask.

Q: Let us talk about the other piece of the business that is retail because there speculation is already rife that the next leg of or string of investments might happen in retail, a – do you concur and which way do you think they could go - traditional sort of kirana spaces or brick-and-mortar firms that are struggling today?

A: Frankly, in an omni model there they are correctly following in India, they are not just following a market place model or they are not just a plain vanilla retailer and essentially they have got very strong logistics and distribution network. So effectively rather than following just an Amazon model or just a Walmart model and even a Walmart is now sort of has globally, increasingly following omni model, so that is actually the strategic model which is the right way forward actually for a very fragmented country where your per capita income is barely Rs 2,000 and to that extent logistics and distribution chains is as important if not more important than just customer reach. The customer reach, if you look at the Amazon’s of the world are really giving away a deep discounts and then you have got limited USP. So I think it is that holistic approach which Reliance has had for a time immemorial which is full horizontal and vertical integration and coupled with that economies of scale which is following even in this business rightly.

Now to that extent there are going to be several opportunities that come up and there is going to be constant learning and I think any single opportunity is not going to be a complete game-changer. I think it could enhance the business, of course, it depends on the price and value that they pay, it could enhance the business but I think it is a very long haul.

We are talking about Reliance’s retail turnover today is roughly about USD 25-30 billion and is of a USD 100 billion unorganized market, so they are already very dominant there. But one is talking about an organised market size of a trillion dollars and therefore there are going to be a lot of things which need to be done on this front across the board both market place, kirana stores, or logistics, distribution and sourcing.

First Published:Jun 19, 2020 3:39 PM IST