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Mukesh Ambani, chairman of Reliance Industries, at an event in Mumbai last year to mark 100 million Reliance Jio customers. His aim in the next "golden decade," as he describes it, is to extract at least half of the company's revenues from consumer businesses, including telecom.
Company in focus

For Reliance Industries, consumer data is the 'new oil'

Indian conglomerate's transformation centers on telecom business

ROSEMARY MARANDI, Nikkei staff writer | India

MUMBAI -- Mukesh Ambani, India's richest man and chairman of Reliance Industries, the country's second most-valued company by market cap, is getting back the loved sheep that has been lost for the past 13 years.

India's Supreme Court on Aug. 3 cleared the settlement between Mukesh's younger brother Anil Ambani's debt-strapped company Reliance Communications and the local unit of Ericsson, a deal under which the Swedish equipment maker agreed to accept 5.5 billion rupees ($80 million) from the company instead of the 15 billion rupees it was owed. The order paves the way for Reliance Communications to sell its consumer telecommunications assets to Reliance Jio Infocomm, the company run by Mukesh.

Consumer telecom originally was Mukesh's brainchild and his first love. But for reasons never disclosed, the business went to Anil after Reliance Industries was split in 2005, following a bitter succession war after the death of patriarch Dhirubhai Ambani, the brothers' father, in 2002.

A non-compete clause in the agreement to split had ensured the brothers could not enter into each other's areas of business, but that clause was to be scrapped five years later. The same year, Mukesh re-entered the telecom business and launched Reliance Jio in 2016.

Mukesh is paying 250 billion rupees to buy the assets of Reliance Communications, which was pushed to the brink of bankruptcy by the entry of Reliance Jio in 2016. The younger brother's company, which was already struggling because of a declining number of customers and limited funds to invest for expansion, succumbed to Reliance Jio's deep discounts and "virtually free" offers.

The acquisition not only pushes Reliance Communications out of the consumer telecom business, but it clears the deck for Mukesh to get on with his ambition of creating a mammoth telecom venture and, in turn, driving the conglomerate's move to boost its consumer businesses to match the growth of its traditional business-to-business portfolio.

Telecom is at the heart of this massive transition.

"Data is the new oil," Ambani, whose new business revolves around the power of telecom information, has said. "India does not need to import it. We have it in super-abundance. It will be a new source of value and will create opportunities and prosperity for India and millions of Indians."

Ambani recognizes that consumer-facing businesses will fuel the next phase of growth for Reliance Industries. With consumer businesses, he is planning to tap on India's optimistic consumption story, increasing incomes and rapidly growing economy. Also, the global uncertainty around oil and growing demand for alternative fuels is making it necessary to not depend solely on the oil and gas business. The consumer businesses would help him reach all Indians, rather than the reach of the oil and gas, which is purely to businesses.

"Our consumer businesses will contribute nearly as much to the overall earnings of the company as our energy and petrochemical businesses," Ambani told an auditorium overflowing with shareholders at the company's annual meeting in July. His aim in the next "golden decade," as he describes it, is to extract at least half of the group's revenues from consumer businesses, such as retail, telecom, media and entertainment, and financial services.

As of the quarter ending in June, consumer businesses such as Reliance Retail and Reliance Jio have contributed 21% to the company's operating income.

The contribution was just 2% during the financial year ended March 2017 and 13.1% in the year ended March 2018, with the rest coming in from the traditional businesses of oil production and refining. The oil-to-retail conglomerate earned a net profit of 360.8 billion rupees on revenue of 4.307 trillion rupees in the year ended March 2018.

Reliance Industries' current attention to the consumer sector covers two areas: fiber optics-based fixed-line broadband services with a commercial launch planned for Aug. 15, and the mega-integration of the Reliance Jio and retail platforms into a hybrid model.

That hybrid model will bring under one platform Reliance Retail's 350 million customers as well as the 215 million users of Reliance Jio's mobile services and the 50 million targeted customers of new fixed-line broadband service, Jio GigaFiber.

"This [hybrid] platform has the potential to redefine retailing in India and become one of the biggest new growth engines for Reliance in the years to come," Ambani said at the annual meeting. "I am confident that our growth in these consumer businesses, based on asset-light platforms of the future, will be nonlinear and exponential."

While the work for laying the optical fiber network was done simultaneously with the fourth-generation, or 4G, mobile broadband expansion and testing, the platform is currently being tested among small shop owners in several cities.

According to a source at the company, Reliance is running a pilot project in some cities in India to test an app that local mom-and-pop shops can use to place bulk orders from Reliance's cash-and-carry stores, maintain inventories and integrate the supply chain, accept payments and other services. Reliance will also help these neighborhood store owners file their goods and services tax returns. Reliance Trends stores have also started housing a kiosk for buyers to explore and order apparel and accessories from online site Ajio, creating a complete ecosystem for omnichannel retail, or "new commerce," as Ambani calls it.

With the balanced diversification, Reliance Industries is securing its future at a time when the world is moving to alternate fuels from the traditional sources. "It is our belief that the rapidly increasing demand for petrochemicals maximizing oil-to-chemicals conversion will play a catalytic role in determining profitability of hydrocarbons businesses of the future," he said at the July meeting.

Reliance Industries, in the past few years, aggressively invested in buying media and entertainment companies, with its most prominent acquisitions being CNBC's local affiliate channel CNBC TV18 and local ETV Network, which itself has a bouquet of about 13 channels.

The transition is also about Ambani creating a legacy of his own beyond the empire created by his father.

Dhirubhai Ambani, the founder of Reliance, began with a consumer business: textile trading in the 1950s. The turning point came in the 1960s when he bought a mill in his home state of Gujarat to manufacture textile. His ambitions were huge but financial resources were limited. So he listed erstwhile Reliance Textile Industries in 1977 to reap the benefits of the equity market. After that, it was a journey of backward integration of the supply chain, with the company producing raw material polyester, then entering petrochemicals refining.

Mukesh -- the eldest son of Dhirubhai's four children (there are two daughters) -- then completed the integration after his father's death, with production of hydrocarbons. In 2008, Reliance Industries began production in the oil fields off the east coast of India. The exploration of oil fields were awarded to Reliance under the Indian government's New Exploration Licensing Policy to encourage private sector companies to explore big oil and gas assets.

All throughout, though, attempts at entering consumer businesses were continually made. In 2002, the group had entered the telecom business with Infocomm, later known as Reliance Communications, but the venture was not successful. At the same time, the undivided Reliance Industries also entered other businesses, such as energy and financial services.

A Reliance market in Mumbai. Mukesh Ambani's vision and clarity in strategy, insiders at the company say, is reminiscent of his father's own journey. (Photo by Ken Kobayashi)

When the bitter battle between the two brothers was settled in June 2005, after nearly three years of a succession war, most new consumer businesses went to Anil, and Mukesh inherited the core oil and gas business. Anil's group companies were called Reliance Anil Dhirubhai Ambani Group, or simply Reliance Group, while Mukesh retained the name of the flagship Reliance Industries.

But Mukesh was loath to let go of his baby, the telecom business. So after the noncompete agreement with his warring brother ended in 2010, Mukesh was quick to buy Infotel Broadband Services, the only company that had won broadband spectrum waves in all 22 circles on offer by the government. It was a wonder for watchers at that point in time, but Reliance Industries clearly had a big plan.

Reliance Industries dropped the bomb, Reliance Jio in 2016, pushing even the likes of the telecom arm of the Tata Group and mighty Vodafone and Idea Cellular, to either merge or exit the sector.

While the deal signed between Reliance Communications and Reliance Jio in December was seen as a gesture by the older sibling bailing out his younger brother, Reliance Industries' executives have continually rejected such perceptions, calling the deal a "pure business" transaction -- and one that will boost the company's step-by-step attempt to kill competition and dominate the market.

Mukesh's vision and clarity in strategy, insiders at Reliance say, is reminiscent of his father's own journey. In two things, Mukesh and Dhirubhai are similar: disturb the status quo and integrate channels of business.

"Their typical strategy is not to innovate in the business -- their typical strategy is to disrupt the business," said Deven Choksey, managing director of KR Choksey Investment Managers. "They typically study the business, see how the business is trending and then make the best out of it. They ride on somebody's learning and then they ride on neutrality."

In Dhirubhai's time, his fast growth disturbed Mumbai's elite business community. He was scorned as the nouveau riche, and his rise was also attributed to his tactic of influencing the governments of the 1980s and 1990s. His textile brand, Vimal, disrupted the sector with a cheaper alternative to cotton. Polyester became the center of one of India's first corporate wars, which was fought between Reliance Industries and then-textile czar Nusli Wadia of Bombay Dyeing. Reliance Industries is one of the very few private companies involved in the upstream and downstream oil businesses in the otherwise public-sector dominated industry.

Mukesh is following the tradition of channel integration with his plan to create an ecosystem whose goal is to drive consumers to ultimately pay for data used on Reliance Jio's network. While Dhirubhai adopted backward integration in the petrochemical business and made money along the way, Mukesh's strategy is a simultaneous integration. He is as much investing in creating an online content portfolio through acquisitions and stakes in media, entertainment and greenfield ventures, such as online retail, as he is in expanding his communications network's reach.

According to a note from Jefferies Group, Reliance Industries entered 10 deals during the year ended March 2018, with six of them in the media, entertainment and telecom sectors. It paid 17.8 billion rupees during the period and is staring at commitments worth over $1 billion in the current financial year "and more thereafter."

Jefferies has flagged that the aggressive expansion in the consumer sector is rapidly pushing up the company's liabilities. Consolidated net liabilities rose $4 billion to $38.2 billion by March 2018 from a year earlier and could rise further, Jeffries said. "Reliance's balance sheet has doubled in the past six years to $100 billion funded partly by higher leverage," it said.

However, because the company is sitting on a huge cash pile of 794 billion rupees as of June, the market is not too concerned. Reliance Industries' shares on the Bombay Stock Exchange have soared more than 57% over the past year.

Investors small and large, who have gained immensely from trading in shares of the company over the last 40 years, appear quite confident on its future plans.

It is very likely that in the next four decades, the Reliance Industries that investors know will look very different. Alternative fuel sources could take over the oil and gas businesses, and the company could shed its business-to-business image and create a closer association with consumers.

The question, then, is whether oil and gas will still be the mainstay or whether the company will eventually exit it.

"No one can really tell," Choksey said, but he is betting that Reliance will make a splash in alternative fuels as promised by Mukesh Ambani. As an investor, Choksey is keenly awaiting Reliance's expansion into agriculture, health care and education.

Also being closely watched is whether the disrupter will finally become an innovator and whether the warring brothers, who now seem more cordial, finally make up.

Whatever transpires, the elder brother's vision is very clear for now. He wants to make Reliance Industries among the top 20 companies in the world.

In a rhetorical sequence of questions, Ambani unveiled his dream in December on the 40th anniversary of the company's initial public offering.

"Can Reliance become a leading provider of clean and affordable energy to India? Can Reliance be a leading global producer of these innovative new materials? ... Can Jio be the first company to transform an entire nation in each one of these [retail, financial services and telecom] sectors?" he asked.

"Can Reliance and Jio partner and empower all Indians, our fellow-citizens, small businesses and enterprises so that India can become a global super-power?" He answered all those questions in the affirmative.

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