💀 Skeletons in Reliance’s Financial Closet?
RIL recently made the whole country proud after reaching $100bn revenue milestone. But some investors aren’t happy. Here’s why.
Mukesh Ambani just cannot quit his habit of making it to the headlines.
But this time he is not making headlines for yet another acquisition (is someone keeping count?) or his rivalry with Gautam Adani.
No, this time it's for something that’s good news for the whole country.
Reliance Industries Limited (RIL) has become the first Indian company to hit a $104 billion revenue in a year! This puts it in the same league as the world's top 100 companies, a list that includes the likes of Hyundai and Nestle.
But despite this great news, the company's shares have been falling. Wondering why? ReadOn!
🎊 Good News First
Let's focus on the positives first:
Reliance saw a 47% increase in revenue year-on-year.
It also saw a record annual profit of $9 billion, up 26.2% since last year.
And it struck deals that covered four whole pages in its annual report.
This crazy growth has come due to Reliance's focus on expansion and diversification.
The company had for long been focusing mainly on its oil and petrochemicals business, which was a good idea since the sector is recession-proof.
But in the last few years, the future of this sector has become uncertain as the world is thinking of quitting oil due to its negative consequences on the environment.
So, Reliance has been focusing on expanding its retail and digital arms, which is what has led to its success.
Ambani has managed to scale up these businesses very rapidly through massive investments and acquisitions. He spent almost $1 billion to strike 10 deals in the ecommerce, green energy and fashion sectors in the Jan-March quarter.
Thanks to this, Reliance Retail now has an annual revenue of $26.3 billion, which is almost 25% of RIL’s total revenue (just 5 years back the company accounted for 15% of RIL’s total revenue).
Plus, Jio has led to an expansion of Reliance’s telecom and digital arm. Jio Platforms (of which Jio is a subsidiary) is one of the most profitable telecom companies in the country right now ( after having disrupted the whole sector in 2016).
But despite making these huge strides, why are RIL shares down 4%?
👛 Two Sides to Each Coin
Well, one could claim that this is just part of the marketwide sell-off that is going on right now because of the RBI’s and the Fed’s interest rate hike (you can read all about it here).
But RIL’s results have also played a part in this decline. Huh?
While the good bits about RIL’s results may be making headlines, there are a few curveballs in the reports.
For instance, the company’s net profit declined by 12% in Q4. Yes, even though the company’s profit increased on the whole annually, its Q4 performance was bad.
The same goes for Reliance Retail’s profits, which fell 5% last quarter.
And although Jio saw massive growth in data traffic, it has been steadily losing customers (it lost 9 million subscribers in January and 3.6 million in February).
Though losing these idle non-paying customers may be the exact reason why its average revenue per customer increased, the loss has scared investors who think Jio may be over its prime.
And that’s not all, the company’s debt has also increased in the last quarter.
All of this could be due to the massive investments that Reliance made in the last quarter, which will pay off in the long run.
So, do investors’ concerns about Reliance make sense?
Well, on the one hand, it doesn’t make sense to doubt a company that is making billions of profits and which accounts for 8% of India’s total exports.
But on the other hand, Reliance seems to be taking larger and larger risks in the retail and ecommerce sectors where it faces competition from giants like Amazon and Flipkart.
And its mounting debt does not seem to be helping investors’ worries.
While some might believe that Reliance is now too big to fall, investors may not be completely wrong in worrying about the company’s performance in the coming times when borrowing costs are going to get much much higher.
The ball is in Reliance’s court now. It has to prove to investors that the money it spent on acquisitions was worth it and not just a wild spending spree.
Only time will tell if it is actually able to achieve this objective.
⚡ In a line: Though Reliance’s $100 billion revenue milestone may seem great, its rising debts and falling customer base and profits are making investors skeptical about its future.
💡 Quick question: Do you think Reliance is too big to fail now?
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