Case study of Reliance: An unconventional diversification story

With this piece, we take a look at a case study of reliance: An Unconventional Diversification story. It covers everything about the rise of Reliance starting…

“Taking advantage of an opportunity is smart; creating one is excellence.”

In the near future, every management school in the World would be analysing the critical case study of Reliance Industries. The company that surpassed the learnings of a management classroom and rose to become a behemothic conglomerate.

In 2002, after the death of business tycoon Dhirubhai Ambani, there was a tussle between the two sons, Anil and Mukesh, to gain control over the Reliance Empire. Started in 1973, it traversed from polyester business to financial services, infrastructure, power, and communication industry. With a gross turnover of US $13.7 Bn, it was one of the biggest firms in India. It was considered in the same group as the coveted Tatas and Birlas.

The Conception of Jio

Mukesh, the elder brother, was allotted the same assets from his split with Anil. He had entered a pact of a non-competition agreement with him for the telecommunication sector. After the contract expired, he acquired Infotel Broadband in 2010 to enter the telecom market.

Case study of Reliance: An unconventional diversification story

By then, Mukesh was the richest man in India and controlled a firm having deep significance in the value chain of the most valuable resource -Oil. It did not take him much to realise that ‘data was going to be the new oil’. Thus in 2012, when RIL Chairman uttered the words, “What has brought us here, will not take us to the future”. Only a few would have anticipated the disruption the man thought of bringing to the Indian Economy.

It just took him 4 years to establish the entire digital infrastructure to launch the world’s cheapest internet service provider, Jio, in September 2016. A brand that has dwarfed all its other competitors and forayed into uncharted waters.

Winning in uncharted waters

In 2016, Mukesh Ambani was ranked 36th in the Forbes world’s wealthiest rankings. His firm, RIL, had a valuation of INR 3.42 lakh crores. It was a time when Indian telecom firms had introduced the 4G technology. But only the affluent class could afford the highly-priced service while the middle class had to track every byte consumed. With over a billion telecom users in India, only 300 Mn were using data-enabled smartphones. There was a huge market that Mukesh could tap. RIL made announcement providing lifetime voice calls and free data for the initial three months (which eventually got extended for three more quarters). This fed on the misery of the incumbent telecom firms while acting as a boon for the complementary product, the smartphones.

Aircel, Reliance Communications, Sistema, Telenor-all ceased to exist in the next few months. And, the ones who survived ended up merging their businesses (Vodafone-idea) or faced a historic decrease in profit margins (Airtel).

The Rise and Rise of Reliance Jio

In 9 months Jio had amassed 108 million users (72 million users who had paid Rs 99 for Jio Prime Membership). Reliance had huge debts from the investments foregone into establishing the entire digital infrastructure. Jio, to sustain loyalty, introduced plans with free calling and high-speed 4G data at the rate of $0.2 per GB. This led the competitors, who were charging $5 per GB, to follow suit.

Jio was one of the fastest-growing telecom firms worldwide. Nevertheless, only the naïve thought that Ambani aspired just to become a telecom giant. If the Internet was privately owned, perhaps Amazon, Alphabet and Facebook will not have been so exciting. Following the same thought, the vision of RIL was not to earn from Jio as a telecom business… But, instead to create an ecosystem which would house all the new modern-age profit-generating businesses.

Case study of Reliance Jio - Revenue streams of Reliance Industries

In 2019, taking advantage of data privatisation matters of the Indian Government… Reliance struck a deal with Microsoft to create data centres in India. Jio, apart from telecom, focused on additional revenue streams as well.

The telecom networks had a fixed source of revenue, whereas, the firms using their bandwidth such as Google, Apple, and Netflix became multi-billion-dollar firms. Jio showed other firms that the entire asset, infrastructure, and licensing costs can be monetised by smart investments. And showcased their vision of creating substantial B2B revenue-generating divisions. Among all the OTT platforms, it is the Jio TV which is the current market leader in terms of downloads. Yes, way ahead than even Netflix or amazon prime. This vertical integration in the value chain reaped benefits as Reliance leveraged its ownership of Viacom18, Balaji telefilms, Eros and Saavn.

Venturing into the Retail Business

This tenacity and challenging behaviour of Mukesh Ambani set the firm apart. Instead of focusing on conventional charge-the-customer for the call, it created an entirely different portfolio of retail chains. This led to even robust growth of Reliance Retail whose 34% of revenue in FY20 came from JIO billing and sim card sales (strong network effects). In the last five years, Reliance Retail has piggybacked on the growth of Jio and quadrupled to 11,784 stores from 2621 stores in 2015. Thus, witnessing substantial revenues from grocery, lifestyle, and fashion segments. However, with all the success still not being enough; Mr Ambani is already financing the deal, as we write, to buy another successful retailer-Future Group founded by Kishore Biyani.

Case study of Reliance Jio - Retail revenue

The suitability of this entire diversification can be understood from the fact that in 2020 itself. RIL’s stock price has nearly doubled, and Mr Ambani ranked 4th richest person in the world (he currently ranks 6th richest). All this while the petroleum prices (the OG business) reached its lowest price in the last two decades. In 2007 before the financial crisis, RIL’ shares had a beta value of 0.7, with only Brent crude in its portfolio. Today the figure stands at 0.14 signifying the reducing dependence on oil prices.

From partnering with Facebook (invested $ 5.7 billion for nearly 10% stake) to Google (about to invest $ 4.5 billion for 7.7% stake in addition to joint development of smartphones) to Amazon (rumoured to be interested in buying a stake in RIL’s retail arm); The business has the vision of absolute domination over a host of Indian Sectors. Mukesh promised its shareholders that RIL would be debt-free by March 2021. By selling 33% stake of Jio’s multiple platforms for an investment of INR 1,52,000 crores, he achieved the feat in 2020 itself.

Future of Reliance Industries

Carrying on this spirit of entering fields with disruptions, Jio is now eyeing creating its 5G network solution. This solution will be competing against the likes of Nokia, Ericsson and ZTE.

The company’s emphasis on becoming a digital leader in domains of AI, ML, IoT, Blockchain, Gaming, Videoconferencing, AR/VR, e-commerce. All supported by Cloud/edge computing is evident from nearly 33+ mergers and acquisitions it has engaged in with most deals in the domain of digital, retail and related verticals. All of this has cost RIL a whopping $3 Billion.

Thus, what followed Jio is nothing short of a revolution which has changed the nation as we know it.

The entry of Jio was a game-changer as it made affordable internet access to all. The billion-dollar start-up valuations, availability of anything at a click. And finally, the Direct Benefit Transfer leading to reductions in corruption – all are some of the indirect outcomes that can be attributed to the Jio. It democratised the opportunities and broke the digital divide between the elites and the commons by bringing data at dirt-cheap prices.

Reliance-Jio-News-Casereads-rise-of-reliance
Cost per GB after Jio entered the market. Source: ‘impact of Reliance’s entry report

As we were writing this piece.. only a few days back on 18th August, RIL bought a majority stake of 60% in an e-pharmacy start-up called Netmeds for INR 620 crore. The decision was pending for a long time. Netmeds is a licensed e-pharma portal that offers authenticated prescription. It also offers over the counter (OTC) medicine along with other health products in India. The move came after Amazon setup its “Amazon Pharmacy” in Bengaluru setting the stage for a hot contest between Amazon and RIL. Indian E-pharmacy has been witnessing rise post-COVID-19 and with this move, Reliance is now competing with Amazon in every sector.

Final thoughts

From a business perspective, RIL is conventionally an organisation with 90% of its cash flows in the past decade coming from the petrochemical business. Something ubiquitous for the owners of the largest refinery of the world. But in FY20, the firm generated 35% of its cash flows from the consumer business. This was done by combining the power of 387 million strong 4G Jio Subscribers with its modern retail platforms. Today JPL’s valuation is more than the start-ups like Zoom, Uber, Twitter that entered way before Jio in the market. No wonder, it is an organisation which has strategic partners like Microsoft, Google, and Facebook, three of the biggest firms in the world.

Authors

The authors of this piece are Shshank Pandey and Ankit Thakur, students at XLRI Jamshedpur. If you liked the piece, go ahead and share it on WhatsApp or Twitter. We’ve also created an HD Infographic that summarizes some bits of this story, you can get it by signing up here.

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