How investments in tech are helping Asia's richest man diversify his business

Reliance’s digital services unit Jio Platforms has netted almost $16 billion from a series of high profile investors like Facebook, Qualcomm and Mubadala Investment Company

FILE PHOTO: Mukesh Ambani, chairman and managing director of Reliance Industries, attends the World Economic Forum (WEF) meeting in Davos, Switzerland, Jan. 23, 2018. REUTERS/Denis Balibouse/File Photo

For decades, Mukesh Ambani’s empire has been supported by the energy flank he inherited from his father.

But when Mr Ambani faces shareholders at Reliance Industries' annual meeting on Wednesday, he’ll be speaking on behalf of an empire that is increasingly breaking free from oil-price fortunes. The billionaire’s string of deals with Facebook and other Silicon Valley players this year have propelled Reliance into the e-commerce and technology space like never before.

The stock has more than doubled since a low in March to a record as Jio Platforms, Reliance’s digital services business unit, netted almost $16 billion (Dh58.8bn) in a fundraising blitz. All this at a time when sentiment in the oil market remains fragile even after prices have recovered from a two-decade low.

Business-to-consumer sectors like retail and digital are more resilient to economic shocks

The flurry of deals for Jio have backed Mr Ambani’s ambition to morph Reliance from an energy company to an e-commerce giant. They’ve also reduced oil’s influence on the company’s stock price. The company’s shares have a beta of 0.14 with Brent crude now, meaning a 1 per cent weekly drop in oil causes no more than 0.14 per cent fall in Reliance. This factor was as high as 0.7 during the 2008 meltdown, data compiled by Bloomberg shows.

Jio is at the centre of Ambani’s drive to create a homegrown version of Alibaba Group. The tie-up with Facebook has given the venture a Silicon Valley stamp of approval and has lured a dozen investors, enthused by the unit’s potential to shake up online retail, content streaming, digital payments, education and health care in a market of 1.3 billion people.

“Business-to-consumer sectors like retail and digital are more resilient to economic shocks,” said Harsh Dole, an analyst at India Infoline Finance. “These sectors fetch a premium return for valuation. The stock has been a beneficiary of that, no doubt.”

Facebook, which paid $5.7bn for about 10 per cent of Jio Platforms, has said it expects the tie-up will make WhatsApp the primary way millions of India’s small businesses connect with customers. The messaging app has roughly 400 million users in the country, about the same as Reliance Jio Infocomm’s subscriber base for wireless services.

All told, the sale of 25.2 per cent of Jio along with a $7bn rights issue to Reliance shareholders allowed Mr Ambani to declare his flagship free of net debt earlier than the March 2021 target. Last week, BP paid $1bn for a 49 per cent stake in the company’s fuel retail business, completing a deal announced in 2019. Reliance said it had net debt of 1.6 trillion rupees (Dh77.9bn) as of March.

The diversification has begun to trim the company’s dependence on the cyclical energy-related businesses. Petrochemicals and refining, which made up almost all of Reliance’s earnings in 2017, has since shrunk to 65 per cent. The contribution from digital and retail businesses has increased threefold during the period.

Not all analysts are sounding the all-clear for Reliance just yet.

On paper, Reliance is ‘net debt zero’ ahead of schedule. In reality, about 75 per cent of the rights issue funds will come in next year. Macquarie Capital estimates the company still has about $16bn in net debt due to interest-bearing obligations – such as deferred spectrum charges and capex creditors – as well as off-balance sheet debt under its tower and fibre investment trusts.

“We are cautious on the ability of the company to generate sustainable free cash flow due to major expenditures in the digital and retail businesses,” said Aditya Suresh, head of India research at Macquarie. He has an underperform recommendation on the stock.

While the relentless rally has left the stock’s 16 per cent tumble in March feeling like a distant memory, the ascent may slow if the still-spreading pandemic prompts investors to pocket the gains, according to Equinomics Research & Advisory.

The stock fell 0.2 per cent at 10am on Tuesday after a three-day rally, though the price remains about 13 per cent higher than the average one-year target. For now, the optimism surrounding Reliance’s digital and telecom forays will likely support the premium.

“The market is rewarding these necessary services,” Equinomics’ chief investment officer Chokkalingam G said.