Reliance Industries’ (RIL) recent annual general meeting (AGM) announced positive performance for the year 2020-21, outperforming its peers across industries like oil and gas, telecom, retail and media. Capital raised and assets monetized during the year of more than ₹2.6 lakh crores are sheerly mind boggling and unheard of.
The telecom business of Jio where investments of close to ₹3 lakh crore had gone in over the last five years, is now sitting pretty with more than 400 million subscribers; it is now the second largest global telecom company horning its capabilities around multiple emerging technologies including 5G, Artificial Intelligence, machine learning, blockchain and mixed reality. RIL’s retail business is now the largest in the country, six times bigger than the next competitor.
One thing that stood apart in the recent AGM is that the investment commitments announced were well beyond the realms of its existing business and current times, looking well ahead into the future. Some of the strategic partnerships with global giants are quite impressive; be it Saudi Aramco, BP, Google, Microsoft, and Facebook.
RIL announced launching an integrated renewable energy business with intended investments of ₹75,000 crores in green energy projects over the next three years by establishing ‘giga scale’ factories for manufacturing solar photovoltaic modules, energy storage batteries, electrolyser to produce green hydrogen and fuel cell manufacturing. RIL intends to contribute to around 20% of India’s 450MW overall renewable energy target of 450 MW by 2030. These are by no means ordinary targets to commit.
In spite of such robust performance, futuristic resource commitments and more than anything, firmly tying up with the best of the global partners, the share price of RIL has lost close to 6% since its annual general meeting. Although this pretty well could purely be a short term reaction, this however does signal some shortcoming in what the management of RIL is attempting to convey to the investors!
A number of reasons for this fall in share price have been discussed, attributed and advocated by analysts; booking profits by investors, unwinding long term positions and the lack of transparency on the ‘JioPhone Next’ the affordable phone developed with Google, etc. Analysts also view that the unhappiness of investors in the non-closure of the $15 billion Saudi Aramco deal, which has been mentioned over the last three AGMs, is also contributory. Some of these are true; but these are short term reactions and will not impact the long-term value perception of the company, which has been built to such scale.
A contrary, but seasoned view could be that the shareholders are a bit unclear as there is a lack of transparency on how the diversified and complex businesses within RIL are currently ‘structured’. RIL is now a behemoth conglomerate with each individual diversified business sucking monstrous capital. More than anything, from a transparency perspective, investors need to know which business is producing cash and which are consuming; although segment reporting to a certain extent gives this picture, but very difficult to comprehend by a layman. If RIL provides a clear ‘roadmap’ on a restructure, enhancing clarity and transparency on the above issues, there is huge value to be ‘unlocked’ in this diversified conglomerate, over the medium to long term. Providing this ‘roadmap’ including clear timelines should be the top most priority for the management. Let me explain this further.
Over the last six years, RIL has been extremely forward thinking and the capital sunk into diversified businesses has been growing at a compounded average annual growth rate of more than 20%. Such massive outlay of capital is what has positioned its telecom and retail businesses at such scale and size, today. However, when it comes to monetizing these assets, over the last six years, revenue generated from these assets has been growing on cumulative average of only at around 11% resulting in deteriorating ‘capital turnover’; in essence, the assets are yet to be fully sweated out! The pandemic has further aggravated this problem. This indicates that there is huge value to be ‘unlocked’. For example, the investments that have gone into the telecom business and the resultant assets that are in place currently handles 425 million subscribers, but can handle an additional 200 million subscribers without incremental capital investments. That shows the ‘headroom’ capital available.
Given the task on hand, RIL’s immediate focus should be to embark on this ‘value unlocking’ journey on the invested capital. Further, given the huge investments that are in the pipeline over the next three years, rather than the CEO and the board taking a broad brush ‘generalist’ overview and managing the diversified conglomerate, announcing a strong ‘vertical focused specialist’ leadership team within each business (Oil to chemicals, exploration and production, retail, telecom, media) becomes inevitable; such signaling is crucial to give confidence to the investors. Ahead of which announcing a clear ‘road-map’ with timelines on how the varied businesses will be reorganized within RIL becomes paramount. Speedy restructuring into focussed business is the only way to achieve this.
RIL’s intention to restructure the company has also been on the cards off late; it intends to restructure closely related businesses into four clusters; ‘Oil to chemical’ cluster will house all refining and petrochemical businesses and the associated strategic alliances, ‘retail’ cluster will include lifestyle, fashion, grocery and other allied businesses including the e-commerce platform JioMart and ‘Jio Platforms’ where businesses including telecom, digital and mobility will be structured into. The media businesses are also intended to be consolidated into a separate company.
RIL’s idea is eventually to spinoff these business clusters into individual companies which eventually will be listed in the stock markets through an initial public offering (IPO). While there has been a clear intention to restructure and there have been some recent actions towards that i.e., setting up of subsidiaries (like Reliance Retail Ventures Ltd., Jio Platforms Ltd., etc.) to house these verticals, what is lacking is a clear ‘roadmap’ along with time lines on how these could be spun off and listed, and identifying credible leadership with deep domain capabilities that can run these businesses to unlock shareholder value. This is very important!
Such a road-map is crucial and will be an excellent signal to the market reassuring the investors on the path ahead enhancing transparency, simplifying the current complex structure into focused businesses paving way for each of the businesses to grow and at the same time unlock shareholder value. But this is where the challenge lies; ‘restructure’ is not easy as it sounds, and it is long drawn
Even in well developed economies there has always been a vehement call from the investors to ‘break-up‘ companies into more focused smaller entities, as they become bigger and more complex. As they grow larger to serve a multitude of customer segments and industries, the back-end synergies which were once available across closely related businesses, slowly start ‘waning out’ and hence a ‘break-up’ becomes inevitable. Companies like GE, IBM, ABB, Ebay and PayPal, HP, Alphabet-Google have all gone through a demand for restructuring in some form or the other.
The biggest challenge which emerging market companies, including the large conglomerates in India face, is their ability to wind down their excessive diversified posture and get more focused around a set of ‘closely-related’ businesses that add value to each other. Take for example companies like ITC, Aditya Birla group owned Grasim, Mahindra, L&T, etc., including RIL. All of these are into multiple businesses and are highly diversified. Over the recent years each of these companies have been making serious attempts to restructure their operations into focused companies; however, this has not been an easy task given the size and scale they all have grown into.
Many of the Indian conglomerates are attempting such a restructure and have seen limited success in pulling through the same within short timelines. Aditya Birla Group attempted a restructure by merging Aditya Birla Nuvo with Grasim and to spin off focused businesses out of Grasim, way back in 2016, but to date Grasim continues to remain a highly diversified conglomerate. ITC has attempted the same with its diversified businesses but it is still scratching the surface. Once can say, L&T has by far been one of the most successful players when it comes to restructuring and could be a benchmark for emerging market companies; but see how long a process it has been for L&T, which still remains a ‘work in progress’. Let me explain.
L&Ts business are clustered around infrastructure and energy (primarily construction projects), manufacturing and fabrication of heavy equipment including ship building and defense, and the third cluster being services business, which include information and other technology services, financial services and real estate services. One can argue that leaving out manufacturing and services business, other businesses have some sort of synergies as they draw from the core ‘engineering and construction’ management capabilities.
Knowing well that businesses are moving divergently, each of which need varying core capabilities, L&T started the ‘restructuring’ process way back in 2011, a decade ago. The idea was to eventually group businesses within L&T into ‘related clusters’ and divest them by listing them in the stock markets as independent companies, over a period of time with L&T holding control in each of these ‘independent’ companies.
To this effect, a decade ago L&T started the process and nine internal companies within L&T, called ‘ICs’, were created; the objectives were two-fold. First, to establish ‘domain specific’ sharp and ‘focused’ leadership for each of the IC’s and its businesses. Second, to make the IC’s independent in terms of competency, leadership, decision making, maturity and governance. Once such independence is achieved and with appropriate leadership is in place, the idea is to divest and list these IC’s as independent companies. A decade later such restructure is still, but well, under progress; the point is that it takes time, efforts and perseverance for such restructure to be planned and executed amidst external disruptions, slowdowns and recession.
Restructuring involves taking a very close review of the portfolio of businesses, including their relatedness and synergies and grouping them into related clusters to bring them under a single leadership. In comparison to L&T, RIL and its businesses are much more complicated, from the perspective for diversity and all the more challenging it would be to successfully restructure the company; but providing a clear roadmap and timelines for such restructure and successfully executing the same is what can unlock enormous shareholder value and also give a great comfort factor to the investors.
Given the complexities in restructuring large diversified conglomerates, if RIL is able to show some progress on the above lines, at least by the next AGM in 2022, that will for sure be a winner; this will enhance transparency and investor confidence in such a ‘future looking’ company where there is enormous value that remains to be unlocked.
Views are personal. The author is Professor of Strategy & Program Director, Great Lakes Institute of Management, Chennai.
