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Reliance Industries , whose shares have been underperforming for the last few years following uncertainties about gas pricing and falling production at the Krishna-Godavari offshore fields, has promised further investments of Rs 1,80,000 crore over the next three years.
For investors, though, this means the payback period from their shareholdings may be stretched for a few more years. In fact, in his speech to the Reliance annual general meeting (AGM) on 18 June, Chairman Mukesh Ambani talked about two more years of investing and execution of big projects in retail, refining, petrochemicals and telecom.
The returns will come after that. He said: "The year 2016-17 will be the first full year in which the complete benefits of all these investments will be available to our shareholders, consumers and the society."
This could mean that shareholders will have to stay invested in Reliance for the medium term to reap the benefits from the new investments.
The reasons why investors may have to wait awhile for payback are three-fold.
One is the gas pricing issue, which had become a political football in the run-up to the general elections, forcing delays in the announcement of the increases recommended by the Rangarajan committee. The committee had suggested a market-based formula that would have raised the price from USD 4.2 per mmBtu (million metric British thermal units) to USD 8.4 per mmBtu. Some of Reliance's cost-recovery proposals for past investments are also stuck in arbitration processes.
Ambani made a reference to the political allegations levelled by Arvind Kejriwal against the gas price hike proposal in his AGM speech. Without naming Kejriwal, he said: "Last year, we saw several false allegations, outright lies and half-truths against this business. We addressed all of the allegations with the truth and facts proactively."
Secondly, the Reliance Retail business, despite becoming India's largest in terms of revenue, is not a profitable one yet. Ambani noted that it was not bleeding money at the operating level. He said: "I am pleased to announce that the business grew by 34 percent to reach revenues of Rs 14,496 crore and PBDIT (profit before depreciation, interest and tax) of Rs 363 crore." Margins are clearly still negative at the pre-tax and net levels. And since the retail division is opening one new store every day of the year (its actual record in 2013-14), investments will take time to pay off.
Thirdly, there is the much-delayed launch of Reliance Jio, the 4G network for which Reliance had bought BWA (broadband wireless access) spectrum as far back as 2010. Meanwhile, the company shifted tracks and sought a unified service provider licence to offer the entire range of telecom services. At the last spectrum auction in February, Reliance Jio bid for 1,800 Mhz spectrum in 14 circles, paying another Rs 11,000 crore. This is over and above the Rs 12,800 crore paid for BWA spectrum in 2010 – a dead investment so far.
At the AGM, Ambani indicated that Reliance Jio would be operational in 2015, and perhaps not fully till much later. He said: "Limited field trials with our initial set of services for the broad band services are already underway. Expanded field trials will commence in August this year across multiple cities. These trials would continue through the end of 2014 and early part of 2015. The objective is to ensure that everything that we offer is future-proof and world-class. The year 2015 will see the phased launch of Reliance Jio across India." (Italics mine).
The investments are obviously not limited to the spectrum alone, and Ambani talked of Jio being a Rs 70,000 crore initiative.
The bottomline for investors is thus clear. Due to gas pricing delays, the high expansion costs of Reliance Retail, and the delays in Reliance Jio becoming fully operational, returns will be some time coming.
The share price will probably start reflecting the payoffs only after the launch of Reliance Jio, which anyway will face tremendous competition.
The writer is editor-in-chief, digital and publishing, Network18 Group
Disclosure: Reliance Industries has made an open offer for the takeover of Network18, which owns Moneycontrol.com and other digital, print and TV channels
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