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How Will Reliance Add The Next $30 Billion To Its Market Cap?

By AltG Research On Behalf Of Poornima Vardhan And Taponeel Mukherjee

RIL's motto: "Growth is Life" truly represents the company Dhirubhai Ambani created and Mukesh Ambani built. With Akash at the helm of Jio and Isha expected to take over RIL retail, this is as good a time as any for Mukesh Ambani to think about where the next $30 bn market cap for RIL will come from?

Photo shows IPL match in a stadium in India

RIL's latest today announced its latest results for Q4 2023, where Jio's revenue increased by 12% and net profits rose by 13 year-on-year. While this is in line with analyst expectations, RIL's stock price has declined by ~15% in the last year. So the big question for RIL at this time is: What's next? What does it need to do to add the next $20-$30 Billion to Reliance market cap?

As per AltG's proprietary analysis, we see that Reliance Industries Limited (RIL) needs to take advantage of "product bundling" across its various businesses. This is similar to the wildly successful strategy of US cable operators such as Comcast to offer Internet + TV together or closer home; think McDonald's Happy Meals.

Question: What can RIL do differently to increase revenues and margins significantly?

Answer: The answer is simple (not easy): Bundling. RIL needs to "bundle" its digital asset (the IPL media plan) with its retail business in a Costco-like membership plan to drive significant revenue growth and return on its capital. As part of the bundle, any subscriber who buys the Jio IPL media plan will avail exclusive retail membership that entails them to access RIL Retail for shopping and a 2% cashback on their shopping value. Given its digital, retail and telecom business, RIL is uniquely positioned to create cross-selling of products with zero customer acquisition cost and limited spending on CAPEX or other expenses.

Question: What are RIL's total revenue and cost for IPL digital media rights?

Answer: Let's do a deep dive into the numbers. Digital revenues are expected to grow at an annual rate of approximately 25% for the next 5 years, i.e. 2023 to 2027 (This includes both the subscription fees and advertising revenues). Assuming this growth rate, the total revenues that the digital IPL rights will generate over 5 years will be $2.1 Billion. This is against $3 billion (the cost to acquire the rights of approximately), leading to a shortfall of $900 million.

Question: How will RIL generate additional revenue and Free Cash Flow (FCF)?

This is where bundling comes into play - opening up two sets of consumer bases for monetisation. First, the existing consumer base who had signed up for Disney+Hotstar of 50 Million will continue to subscribe to the digital asset. Second are the new consumers (these are existing Jio consumers who are not currently subscribers of the IPL Media plan) who will sign up for the bundle to avail of the benefits of the bundle. Our analysis assumes that a consumer spends a conservative $152 per year across all RIL retail stores. With a 20% net margin of the retail business, each consumer will create an additional $30 of free cash flow per year due to bundling.

Question: How many subscribers - new and old will sign up for the bundle plan?

Answer: Let's do a scenario analysis for the 50 million existing subscribers. Suppose 10% or 5 million of the existing 50 million subscribers that consume the digital content utilise the retail bundle. In that case, RIL will earn USD 150 over 5 years per consumer and an additional USD 750 Mio over the next 5 years (since each customer creates $30 of additional free cash flow for the company). However, If 35% or 17.5 million of the existing 50 million digital subscribers use the retail bundling offer, it generates an additional USD 2.66 Bio of free cash flow flowing to RIL.

Now for the new consumers (consumers who are not currently subscribers of the digital asset) who will sign up for the bundle to avail of the benefits. Since the new consumers signing up for the bundle pay an average subscription fee of $2 (based on existing Disney + Hotstar ARPU of paying subscribers) and, on average, generate the same USD 30 of free cash flow for RIL from their retail spend. If 5 million new consumers join the bundle, that would mean an additional generation of USD 809 Mio in free cash flow for RIL (we're assuming that the new consumers for the bundle only join in the 1st year and stay on for the next 5 years and that no new consumers join post year 1). Should 25 million new customers join in for the bundle, RIL stands to generate an additional USD 4 Bio in free cash flow from their bundling policy.

Question: How do the returns from bundling and generating additional free cash flows from existing and new consumers add up?

Answer: Getting 15 million new consumers and converting 30% of existing customers would lead to a 127 percent return (17.8 percent annualised) over 5 years on the USD 3 Bio invested in the IPL digital media rights. In another scenario, with 25 million new customers and a 35% conversion rate of existing customers into retail customers, there is a 194 percent (24 percent annualised) return on the investment. Essentially, bundling can generate significant returns on the capital deployed in the IPL digital media rights.

Question: One relevant question is, does RIL have the retail bandwidth to cater to the additional demand that the bundling policy will generate?

Answer: The answer is an unequivocal yes. Of its total 20 USD Bio of revenue from retail, RIL makes approximately 25%, amounting to USD 4.8 Bio from its Fresh, Smart, Trends and other retail stores. (This number excludes Jio stores and fuel retail). That's USD 4.8 Bio of revenues from 3200 stores using 18.8 Million square feet of space. That gives RIL approximately USD 255 of sales per square foot per year. In comparison, DMart sells USD 375 of sales per square foot per year. The fact that DMart does 50% better on a per square foot basis clearly shows the potential to further drive the intensity of sales on a per square foot basis.

In conclusion, combining RIL's prowess in the digital and physical worlds could help create value, and the whole would be worth significantly more than the sum of the parts. This bundling strategy could help RIL unlock its potential for the subsequent growth and value-creation phase.


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