Investing in reliance: ethical dilemma for me! ~ Shareholder Awareness Program

Investing in reliance: ethical dilemma for me!

ethical dilemma while investing in reliance industry limited, growth is life.

Article published as on Friday, 11^th September, 2020 at 6:30 a.m.

As on 10/9/20 reliance industries scaled a life time high of 2344 rupees

Market cap of rupees 15.10 lakh crore

(Disclaimer: the points mentioned here are my personal experiences and opinion)

Let’s assume someone wants to invest in reliance industries on these levels, what return can we expect?

Its market cap is already 15 lakh crore for it to double investor’s wealth it will need to double it's market cap to 30 lakh crore and double its profits from current levels of 39 thousand crores to 78 thousand crores.

Let’s break up valuations of reliance industries limited:

Reliance JIO: 4.9 lakh crore (based on latest Abu Dhabi based Mubadala’s investment, 67% holding of RIL)

Reliance retail: 4.2 lakh crore (pre-equity dilution: based on silver lake investment rumours, 100% holding of RIL)

If we take value of these 2 it comes to 7.48 lakh crores which means that rest of 7.5 lakh crores valuation is going to petrochemical and other business.

Here is a chart to explain valuation

(Well I have taken P/E ratio for simplicity, obviously other factors such as cash flow and management quality are important as well, data for FY 20)

segment	RIL	JIO	Retail	Others*
Market cap	1471000	490000	420000	750000
profits	39773	5562	5539	28672
P/E	36.98	88.09	75.82	26.15

competitors		Airtel	Dmart	ONGC
share price		497	2237	73.65
Market cap		271332	144955	92653
Profit		-31316	1745	10505
P/E		-8.6	83.0	8.81

*Other = Miscellaneous (petrochemical/media/others)

These are all factual things now coming to my personal experience

Reliance retail and reliance Jio in the last 4 to 5 years have tremendously increased their interaction with consumers and customers. And has increased their dominance in this space.

Reliance is becoming market leader in these markets (telecom & retail) now the benefits of these are: bargaining power it uses this towards both its suppliers and consumers.

What I feel is that in the future for the sake of profitability they will use their dominance and size to squeeze out customers and suppliers and in turn increase their own margins.

Here is an example:

1) Reliance retail exits from nexus malls as the rent waiver was not provided to it. (link here)

2) Reliance seeks 10% rent waiver from its fuel retailers (click here)

(Well as a business they have to negotiate for better deals nothing wrong here.)

But at times these negotiations turn into threats of ‘no business ’

Now here comes my personal experience:

Reliance Jio sets up tower on top of certain buildings, to facilitate better network coverage, now during the time of Lockdown the employees of JIO told that you take half of the agreed rent and no yearly rent hike as due to pandemic our business is hit and we are doing cost cutting (part1)

Another experience is that when my mobile recharge was not done (as I use dual SIM), people claiming to be from JIO advised and pursued me to do recharge,(even a small one, but to do recharge) or else they threatened to discontinue my number within 1 or 2 weeks as per TRAI regulation. And then they said my number could be given to anyone.

Well I asked what regulation is this. What notification / circular is it? Tell me I will research, but they didn’t provide the details.

(Unfortunately we don’t do call recording of the conversation’s, so I don’t have any evidence)

Recently again after my plan was expired I got call from JIO, this time they just informed me that my plan was over and informed about various ways I can recharge again.

Well the first call which I got was around the time in May when JIO telecom shares were being sold out to investors:

The caller from JIO also claimed that company can’t afford inactive numbers, they are making losses etc. (can’t remember word to word but something similar was said to me)

now when we see the June quarter results of Reliance JIO we can see super-duper bumper net profits of 2520 crores.

(Now I know how they made so much profits, comment if you also received such calls from JIO)

Now coming to retail part, at its AGM the company announced free covid kit on first order from JIO mart, see for yourself

relaince jio mart free covid kit, expectation versus reality

10 simple plain masks.

Well you can’t complain for free products …

But definitely you feel cheated for not getting what was shown.

To conclude and sum up

Reliance management said in its 2019 AGM that they plan to become net debt free In 18 months and they did it, so the management is credible and capable.

Reliance so far has proved to be wealth creator and its management a visionary but currently what’s going on in the market price is extrapolation of future profits.

What I think is that the Juggernaut of Reliance and JIO is not good for consumers, as the dominance of Reliance grows the consumers and suppliers will be squeezed for profits of the shareholders.

The company has become so large that if it needs to grow further it will have to go into international markets or choose another sector to disrupt for example sectors like gaming or Virtual reality.

Well the management is capable and they have to worry where the next leg of growth will come from, I should not worry much on that.

Also in recent times as we see future group is in crisis, so many other businesses are into crisis and Reliance is taking this opportunity to become market leader, with this I think there will be income inequality and lack of diversity in business landscape. Which is obviously negative to the competition and consumers.

As an investor I am in ethical dilemma, this company may live up to the expectations of investors and share price may also grow, but by what means? Squeezing consumers and suppliers? That seems unethical to me.

So as shares prices grows, investor expectations grows, and to achieve those expectation what means are used is important

For these reasons despite superb businesses I am somehow not convinced as an investor.

(Disclosure: I hold shares in reliance industries, and these were just my personal opinion of the company, take it light heatedly! also feel free to comment down your opinion on share price as well, views and opinions may change in future)

Scrip name: RELIANCE Price: 2314.65

Scrip code: 500325 Market cap: 14, 67,350.26 (crores)

P/E ratio: 49.50 date: 10/9/20 source: bseindia.com