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Matt Luneburg, Sr. Research Analyst
Reliance Industries’ portfolio of products and services touches almost every person in India on a daily basis—and fueled by favorable microeconomic and macroeconomic trends, the company shows no signs of slowing down. In this episode, Sands Capital analyst Matt Luneburg explains why Sands Capital has a strong conviction in Reliance.
2:05 The Indian consumer and economy present unique opportunities for investors
7:52 Why execution and consistency are key driving forces for Reliance
9:54 Multi-industry domination: From currency to textiles to petrochemicals
13:44 Growth potential and backward integration: Oil, gas and refined products
14:17 Telecom’s revenue-per-user potential, what hyper-low internet data rates mean for the Indian economy and investors
16:10 Why India’s low median age matters, from telecom to retail
19:52 From pre-paid feature phones to subscription-based smartphones
19:52 Merging with JioMart to create powerful synergies
22:23 Speed vs. Scale: How Reliance continues to be a growth business
24:15 Creating new markets and bringing small businesses along
29:41 Establishing trust with a skeptical Indian consumer
34:18 Outpacing the field with “green” solutions
38:36 Potential to be a global supplier of renewable energy tech
42:25 The family-owned, family-run factor: risk or asset?
44:16 How Sands Capital researched and analyzed Reliance
47:27 A classic-growth story with pockets of hyper-growth
49:13 Are governmental relations important to future performance?
50:07 How long will Reliance remain a conglomerate? Benefits of divestment.
[00:00:01] Kevin: Welcome to What Matters Most, Sands Capital’s podcast series in which we explore some of the trends and businesses that are propelling the pace of global innovation and changing the way we live and work today and into the future. Today, we’re joined by senior analyst Matt Luneburg. Matt has the distinguished honor of being a repeat guest on the podcast. You may recall that Matt joined us once before to talk about the pest control business, Rentokil [Initial]. And he’s back again today to introduce us to a different sort of business.
[00:00:28] Today we’re talking about Reliance Industries, a company that over the past four decades, has grown from a modest textile company to an integrated player across energy, materials, retail, entertainment, and digital services, describing itself as a business with a portfolio of products that touches almost all Indians on a daily basis. Indeed the company’s motto is “Growth is Life,” and is a company that Matt predicts has positioned itself to be the most important company in India over the next decade.
Reliance is a different sort of business than those we profiled on this podcast. While innovative for sure, It’s more of a model of solid execution on rapidly developing opportunities in a highly dynamic economy. I think what’s exciting about this company, primarily operating in what is generally considered a rather prosaic industry, is its ability to evolve and stay in the center, if not at the forefront of the dynamic changes underway in India, and as such has positioned itself to not only, be a significant beneficiary of this extraordinary growth in that country, but in many cases a key driver.
[00:01:31] It’s now the country’s energy, retail, and telecom juggernaut with expanding opportunities for digital monetization emanating from the significant investments it’s made to expand mobile telephony and internet access across the subcontinent. There are a lot of moving parts in this business so let’s get started.
So first of all, Matt, thanks for joining us again today. It’s good to see you and appreciate, you being a return customer.
[00:01:55] Matthew: Of course, Kevin, great to be back.
[00:01:57] Kevin: so, Matt, let’s see, before we dig into the details of this highly interesting but somewhat complicated company, it might help to set the stage a little bit. We’ve had a positive view of India for at least the last decade, and it’s a country that has been fertile ground for us as growth investors. So why don’t you give us your quick overview of why that is? What’s going on in India from a macro view that gets the team so excited?
[00:02:18] Matthew: Yeah, of course, Kevin. As you mentioned, we’ve had a positive view of India for a very long time now, and that’s manifested in large, absolute, and relative weights across each of our global strategies. That view still holds true today and it really boils down to a handful of really favorable secular drivers. I think first and foremost, it’s home to the world’s largest population and its largest democracy. And it’s a population that also happens to be very young. I think, the median age in India right now is still under 30 years old.
[00:02:51] It’s a fast-growing economy characterized by industry formalization and consolidation. And it’s also being turbocharged by digitalization and a pro-growth policy on the part of government. And that’s unleashing investment and driving significant productivity gains, so we see significant opportunities for wealth creation and upward mobility over the next several decades as India develops.
[00:03:15] And then in the near term, you’ve also got a reconstitution of the global supply chain away from China, which is a tailwind that we really didn’t see, you know, 10 years ago, but here in the near term, it’s certainly helping on the margin. And so all of these factors are contributing to a growing middle class and, aided by more widespread availability of electricity, democratization of information led by low data rates – Reliance is a huge part of that, as we can discuss later – and then innovation driving accelerated business formation.
[00:03:49] And so stepping back, you’ve got an economy that today, the average, GDP is something around $2, 500. That compares to You know, over 60,000 in the U. S., over 12,000 in Chin. In India, that’s likely to rise to 4,000, over time, but we see a lot of headroom from here in terms of, income generation and wealth creation, across India.
[00:04:13] And Reliance is a business that sells petrochemical products and fuel. It sells a variety of consumer goods across different formats. It sells telecommunications devices and services. And each one of those buckets is likely to experience a tremendous amount of growth as the Indian population grows over time, as productivity increases over time, and as Indians get wealthier over time.
[00:04:41] A couple of data points that, I think are very relevant for Reliance are, you know, the number of households earning 10,000 or more annually is expected to more than double over the next decade from around 75 million to 190 million in 2031. And that’s important to Reliance because pretty much every one of its businesses is very strongly correlated to GDP growth. Whether you’re talking about energy and fuel, whether you’re talking about petrochemical and refined products – petrochemicals are the raw inputs that go into everything from construction materials to consumer products to fertilizer – to consumer spending and, spending on telecom, digital services and media. Reliance is there to capture the growth across all of those consumption buckets.
[00:05:24] Kevin: Well, good. So I think you started the introduction on Reliance specifically. Let’s dig into that a little bit more. it’s an interesting business in its scope, right? It covers a lot of different, parts of the Indian economy. Though, before we get into the details of it, you know, it’s at its heart, I guess, at its origins, a petrochemical business. I think it was the largest manufacturer of Polyester back in the day, if I’m not mistaken. How does a senior consumer analyst come across a company like Reliance?
[00:05:54] Matthew: Well, Kevin, you know this, but, I spent the first 10 years or so of my career covering energy specifically. So I’m seeing Reliance in a different light today as a consumer analyst. And when I first started my career, Reliance was a very different beast. But it’s used the enormous cash generation from those energy and petrochemical assets to build India’s largest retail business, India’s largest telecom business [Jio], and an expanding halo of digital services on top of that. In terms of idea generation, you know, we get this question a lot from clients. Where do ideas come from? And they come from a lot of different places. They can come from regular screens, they can come from podcasts that we’re listening to, they can come from industry reading, they can come from discussions with other analysts and portfolio managers, they can just come from discussions with other companies.
[00:06:44] You know, when we meet with companies across our strategies, we ask questions like, “What businesses do you admire?”, “How is the competitive landscape evolving?” “What are your supply chains looking like today?” “What might they look like in the future?” Sometimes these ideas just randomly hit you when you’re taking your shower in the morning.
[00:07:03] But in this case, the discussion was reignited, I think, by a PM, who came to me and said, “Hey, things are changing here, maybe this business is worth a different look. It’s not the Reliance you remember from your prior life in energy.” And so we took a look at what was happening with the retail and the telco assets, and we decided that as long as the petrochemical and refining businesses don’t blow up, this business has a really strong outlook for earnings growth over a very long time horizon. And so we dug in and over about six months, we were able to build conviction in the key tenants of the investment case.
[00:07:38] Kevin: Yeah, so that’s important. Conviction is a big part of our process here, but so are insights, right? So this is a, if I’m not mistaken, a Fortune 500 company, a global Fortune 500. So it’s not an unknown business. What, in your research – and maybe this is where being a consumer analyst actually is an advantage or gives you an edge – but what in your research led you to some unique insights? What do you know about this company that the rest of the world is missing?
[00:08:04] Matthew: You know, I think a lot of the insight comes down to the base of knowledge we’ve built on India, the Indian economy, the Indian consumer, over our 10-plus years of work in the space. For Reliance, history doesn’t always repeat, but it sometimes rhymes. And with Reliance, there’s a common theme across each one of its businesses, and that is: this is a business predicated on execution. It’s not necessarily innovation, but it’s the prudent, disciplined deployment of capital in key growth areas across the Indian economy.
[00:08:39] And as it relates to the insights that really got us comfortable with Reliance in particular – especially its newer forays in retail, which began in the early 2000s, and then Telco, which began in the early 2010s – those are both really execution businesses at their core, but they’re also businesses where scale matters a ton, and Reliance had the capital to build, very rapidly, scale in each of those businesses and then ultimately deliver unmatched value in terms of prices, high quality, to the consumers of those businesses.
[00:09:13] So building conviction in the case of Reliance really relied on our history in India as investors, and understanding how the Indian consumer is evolving, understanding the regulatory backdrop, but also leveraging some of our insights from elsewhere globally as it relates to what is critical in terms of building a lasting consumer franchise?
[00:09:36] What’s necessary to operate a retail business at scale? What does it take to drive returns on capital that are attractive in an expanding telecom market? All of those insights were there elsewhere at the firm, and it just involved re-centering our focus on this particular business in India.
[00:09:55] Kevin: Yeah. So I don’t want to dwell too much on the past, but this is a really interesting business in its development over the years. And in my, sort of shallow reading of it – and I’d like you to go into more detail, for my benefit on this – is that Reliance isn’t just a marginal player in these growth areas within the industry.
[00:10:12] And, they’re certainly one of the key beneficiaries, but in many cases, they were an important enabler of the dynamism and growth in India. Can you kind of tell us about where they were positioned as a leader, kind of developing new markets? And then I think it would be also interesting to talk about the integration of the company’s management with the political forces within India.
[00:10:34] Matthew: Yeah, absolutely. I think those are all really key points. Maybe to go back to the very beginning, the founding of Reliance Industries. The founder, Dhirubhai Ambani, was born in the early 1930s, I believe, in a trading hub in a part of Gujarat [India]. And sometime in the early 1950s, he went to the port of Aden in Yemen to work for A. Besse & Co, which is a French trading outfit, and that part of his career is really credited for honing his trading acumen and business instincts. In fact, there’s a great example from his time in Aden, I think that speaks to his entrepreneurialism and flair for business in that, while he was in Aden – and this had nothing to do with his day job, he noticed that the Yemeni Rial, which is their hard currency, which had a very high silver content, was trading at a discount to the currency itself. So he started buying the currency in bulk, melting it down, and then selling it to traders in London, for profit, before this operation was shut down. But that’s a frequently told example of his business acumen and the trading instincts that he used, to great effect, later on in his career with Reliance. So in the 1950s, he returned to India and started a yarn trading business in the outskirts of Mumbai.
[00:11:55] And soon thereafter diversified into textiles and established a brand that’s still around today, in Vimal, of fabrics, that’s become a household name. In 1977, the company went public, and then the 1980s and 1990s were formative in the company’s history, which a key theme throughout it is this idea of backward integration.
[00:12:15] So from fabrics and textiles, the company backward integrated into petrochemicals, ultimately refining, and then, in more recent years, they’ve even gone further upstream in the oil and gas world into exploration and production. Part of navigating that journey, to your point, Kevin, is, you know, India is not an easy operating environment for a lot of businesses, particularly in those days, and so one of Dhirubhai’s key skills was interfacing with the government to ensure that he remained on the right side of policy as the business developed, whether permitting, whether it’s export-import, he formulated a number of strong connections across political parties in India that allowed this business to flourish and grow at a time of great dynamism in India overall.
[00:13:05] And then those same skillsets have been used in more modern times to formulate the businesses across telecom, across retail, where otherwise, political and bureaucratic red tape can really stymie growth. So that was one of the key skillsets of the company in the early days that I think has helped them in recent years as well.
[00:13:25] Kevin: Okay, so that’s an interesting history on the business, and it kind of describes what we traditionally know the company for, but the oil, gas, and chemicals business isn’t typically a growth business. So, what am I missing? Why don’t you walk us through all the business units in Reliance and what you find attractive and exciting?
[00:13:44] Matthew: Sure. So, in other markets globally, you’re absolutely right. Oil, gas, petrochemicals are not an exciting growth business, particularly with the evolving regulatory backdrop. In India, it’s a bit of a different story, in that petrochemicals demand tends to correlate very strongly with GDP growth, and we have a very constructive outlook for GDP growth in India.
[00:14:08] Likewise for refined products – although Reliance can, can sell those products anywhere, anywhere globally and has – for telecom and retail, let’s break those into those two different business bases. Reliance’s telecom business, began in the 2010s when the company acquired a bunch of Spectrum, quietly, and then built a 4G network very rapidly on top of that.
[00:14:34] But our case for growth for Reliance’s telecom businesses is really pretty simple: It’s, modest. mobile subscriber additions on top of a base of around, 430, 450 million today. But more interestingly, a substantial improvement in ARPU, Average Revenue Per User, over time, as the industry overall moves back to a position where it can be earning an attractive return on its cost of capital.
[00:15:02] In addition, what gives us comfort on the migration of wireless ARPU over time is that India today, the data rates are some of the lowest globally. If you look at data pricing in the US today, it’s around $4 per gigabyte. In India, it’s 14 cents per gigabyte. So there’s a ton of headroom for growth as the economy grows, because what we’ve observed elsewhere globally is a very tight correlation between data pricing and per capita GDP. And as we mentioned before, we have a very favorable outlook for the Indian consumer and their spending power over the next several decades.
[00:15:43] Even China has data rates that are multiples higher than India. And as that Indian consumer matures, as their income rises over time, we expect to see a very powerful pricing tailwind behind data in India, and usage of data, as the number of digital services, engagement with online media, increases over time .
[00:19:13] Kevin: Is it fair to say too that the shift from prepaid to subscription services will also supercharge that transition, that growth?
[00:19:22] Matthew: Absolutely, Kevin. That should help as well on the margin. In fact, we don’t have the exact numbers, but a large number of Jio’s subscribers today are prepaid users. So as they migrate those users over time into post-paid plans, we should see a nice lift to ARPU from that as well.
[00:19:43] Kevin: That also unlocks the ability to cross-sell digital financial services, ecommerce, all that kind of stuff too. Am I thinking about that the right way?
[00:19:50] Matthew: You’re absolutely correct again. And as we mentioned, one of the things that Reliance is beginning to do is merge the MyJio app – which enables the subscriber to monitor and control his or her data plan, as well as the services that are layered on top of it – but, merging that with Reliance Retail and JioMart and what they can do with ecommerce as well. There are some very real synergies in terms of merging those two applications together.
[00:20:23] So not only can you manage your wireless plan, but you can also have immediate access to the JioMart app, and, products across a wide variety of consumption buckets. So, yeah, we see very large synergies from migrating more of those consumers from prepaid to postpaid plans over time, although the company is still in the fairly early innings of that, to our knowledge
[00:20:47] Kevin: Yeah.
[00:20:48] Matthew: And, You know, circling back on this idea of Reliance as one of the most important businesses in India, Reliance’s entry into the telecom space happened at a time when there were over 10 players in the industry. Today there are three. And the reason there are three is when Reliance entered the market, it used its financial strength to offer the most competitive data rates on the market.
[00:21:10] It gave away voice and it took market share hand over fist. And so from nothing in the early 2010s, now you’ve got a telecom business that has over a 60% share in terms of data in India. Data rates as a function of that went from over 250 rupees per gigabyte to around 10 today.
[00:21:32] So it’s really democratized access to information across the country, and it’s been a key, enabler of widespread access to information across the socio-economic pyramid in India. And on the retail side, that’s, I think, one of the most exciting parts of the business from this point forward. A couple reasons: the most important being that Indian retail is a 900 billion dollar market that’s growing in the high single digits overall. Formalized retail is still a very small component of that 900 billion – it’s less than 15 percent today.
[00:22:08] Over time, we expect that to grow. So formalized retail in India overall is growing, we think, at a very solid double-digit clip over the long term. And Reliance has built itself into the undisputed leader in that industry by virtue of scale. You know, we’ve seen this story play out in a number of markets globally, whether it’s Walmart and Costco in the U. S….You know, I used to have a coach when I played sports growing up who used to say all the time that “speed kills” in sports, to the point where it got annoying.
[00:22:40] One lesson that I think we’ve learned over and over in traditional retail globally is that “scale kills.” Whether it’s traditional retail or ecommerce, building scale is critical in building a moat in any retail space. And Reliance has already done that with over 18,000 retail outlets across a variety of categories in India over the last decade.
[00:23:05] Kevin: Before we leave retail, give us an idea of what the competitive landscape looks like. What, you know, informal to formal, what’s the informal picture look like?
[00:23:13] Matthew: So the informal picture in retail, in India – and that’s this is the stuff of opportunity for Reliance – there are 12 million Kiranas, or small mom-and-pop stores, in India, that characterize a lot of this informal marketplace.
[00:23:29] And they sell everything from small electronic devices to groceries. And that is just not scalable as India grows. So we expect to see much more formalization in that sector, as the layers of distribution between the supplier and the Kirana are eroded over time by players like Reliance, which is vertically integrated and which ultimately can offer the consumer a much wider assortment of high-quality products at much lower prices. Because scale ultimately results in better supplier terms, more efficient distribution, greater convenience for the consumer, and better leverage of marketing dollars. So ultimately all those factors translate into share gains, for Reliance more than most, as the country’s leading player.
[00:24:16] Kevin: I read an interesting article the other day about an entrant in the Indian ecosystem, the retail ecosystem.
[00:24:22] Basically it was a player similar to Shopify, in Canada, that was trying to kind of create an ecommerce platform to disrupt the Kiranas. And what I think they discovered is that, unlike developed markets, the infrastructure wasn’t in place to allow that broad countrywide distribution.
[00:24:41] But they’ve pivoted – and I dunno if it’s the same company or not – but the pivot now is companies that are coming in and helping these Kiranas digitize what they do, basically create kind of small micro ecommerce platforms that they can operate still on a local level, with the idea of being able to leapfrog – as a lot of industries have done in India – kind of that middle step, that goes from traditional to modern. And in this case, leapfrogging the brick-and-mortar retail, which I think is really where Reliance is playing.
[00:25:12] So is that a threat, do you think, or is Reliance nimble enough to work its way through that, or does it even exist? I think maybe what you said is the key to this is that even if they can digitize the Kiranas, the number of SKUs or products is still going to be very limited because of their inability to find adequate distribution, or sourcing.
[00:25:33] Matthew: Well, Kevin, that’s a great question in that Reliance is one of the key beneficiaries of that trend, in that several years ago, they launched an initiative that’s called JioMart, which is their B2B and B2C ecommerce, platform. Now there’s a standalone app, there’s a website, they even have a native plugin on WhatsApp, and it’s a really interesting topic because, as you mentioned, Reliance is the largest traditional retailer in the country across a variety of categories.
[00:26:06] I do think one of the most exciting aspects of Reliance’s business from a consumer analyst standpoint is within their retail footprint, the grocery business is a key driver, because as we mentioned before, overall formalized retail is about 15%, give or take, of overall retail spending in India. Grocery is 1%. So there is tremendous headroom for growth within that grocery category. And for Reliance, the company with scale, which is able to offer the most competitive prices with the best distribution and the broadest assortment of high-quality products, that’s really important because, in India, Food and Beverage spending is something like 20% of an Indian’s household budget. In the U. S., that’s 5%, for example.
[00:27:01] So this is a really important spending category where value for money matters, and Reliance is exceptionally well-positioned to drive overwhelming value for its consumers in that particular business space, which has proven to be very profitable in other markets at scale, and we don’t see any reason why that should not be the case with Reliance’s.
[00:27:25] And with scale, you can drive unmatched value. So that could emerge as a very large engine of growth and profitability over the next 5 to 10 years. And so that’s an area where we believe they’re very well positioned to take share. The issue with scaling that sort of a business in a market like India is as you’re scaling that business, you’re obviously creating some challenges for these, 12 million Kiranas, which is politically unpopular, and so you can see where there might be some pushback on that front.
[00:27:59] So, what we think is really interesting about, Reliance’s JioMart initiative is that it’s a savvy way of enabling small merchants to remain competitive in a market that’s increasingly dominated by formalized players, and to benefit from that growth as a B2B supplier.
[00:28:21] So Reliance can leverage all of the distribution that it’s building behind its retail assets, to supply Kirana’s with a much wider assortment of goods and with digital tools that can help them run their business. So one of the things JioMart does is it gives these small business owners tools that they can use to manage inventory, to take care of, taxes, to manage things like advertising and marketing, to gain visibility, within their local markets. So over time, as industry formalizes in India, not only is Reliance going to benefit from share gains, owing to its superior value proposition, but we also think that it can be viewed as a positive change agent for these Kiranas who are willing to invest in their businesses, need a digital front end, and want to grow with the digital consumer in India.
[00:29:20] This is a small part of Reliance’s overall retail revenues today, but we think not only a key revenue and profit pool going forward but also an important, aspect of the business in terms of their positioning vis a vis government because they’re enabling small business as opposed to destroying it.
[00:29:40] Kevin: Yeah, excellent. So clearly they’ve looked at the developed world, the US in particular, and learned some lessons on what not to do in terms of putting you know, putting the mom and pops out of business, but instead actually helping them. And I’ve got to think that creates a pretty significant competitive moat around their business.
[00:29:56] So, you know, a big player like a, US ecommerce platform would have a hard time coming in because this kind of multi- million unit Kirana network is going to be hard to crack. It’s become a pretty formidable player in and of itself. So, that may be right, that may be wrong, but that sort of leads me to my next question. Talk to us about the competitive advantages that you see for this company across those different segments.
[00:30:24] Matthew: Yeah, I think for retail specifically, the moat, as we’ve discussed, is the biggest thing is scale. And that really comes down to better supplier terms, efficient distribution, greater convenience to the consumers as the store network grows over time, and as we mentioned before, better leverage of marketing dollars.
[00:30:46] It also comes down to vertical integration, one of the more recent. initiatives that Reliance Retail has launched has been an FMCG, a Fast Moving Consumer [Goods] products division, where they’re really trying to drive private label, in a great market to have a private label offering because of a few aspects of the Indian consumer:
[00:31:06] One is, developing trust is tough in this market, which historically has operated on a trust deficit, but if you have a brand, like Reliance has, where they are leaders in the local market, that’s very difficult to unseat. And it also allows them to leverage some of the synergies that exist in terms of vertical integration with the other parts of their portfolio, like think plastics and petrochemicals, logistics networks, et cetera, et cetera. But zooming up, their retail business, relative to other players in the market, or really any players globally, benefits from Reliance straddling these different business spaces, particularly telecom in the recent past, in that if you think about a normal retailer, what they know about the consumer is fairly narrow.
[00:31:55] They know what the consumer has purchased at their one-category store, they might know your billing address, and that’s kind of it. Reliance, because of its footprint across digital properties and retail, has a much broader picture of the consumer, which enables them to do a lot of creative things in advertising, merchandising, et cetera.
[00:32:20] Relative to that normal retailer, they’ve got a much broader purchase history, so they know what apparel you’ve purchased. They know what you tend to buy when you go into one of their grocery outlets. They have your financial and credit history, they might even have your precise location to the extent that you give them permission to track you via the MyJio app. They even know your entertainment and media preferences because of your interaction with their digital properties, they know your internet browsing history, they know your social media activity, and they even know your medical history in certain cases.
[00:32:55] So, that paints a much broader picture of the consumer that they can use to deliver value, ultimately. That’s very difficult to compete with and there’s not another company in India that has that data advantage that’s ultimately, we think, going to be very helpful in terms of their positioning on a forward-looking basis.
[00:33:17] Kevin: So when does that advantage catch the eye of the Indian regulators? I’m thinking in particular, India infamously, has kept a number of, Chinese companies out of the country, they’re not allowed to operate there because of some of those privacy issues. Obviously, they’re going to be a champion of their local player until they’re not. So what happens, five, 10 years from now when this company owns all the data?
[00:33:40] Matthew: Well, again, I think, this is a great example of, you know, Reliance is very thoughtful about developing these businesses in compliance with local laws and regulations. And so Reliance has taken the view that the strictest data security framework globally is the European GDPR, and so they operate on the basis of those principles and intend to on a forward-looking basis. So we think that they can leverage all of those advantages to the maximum extent without being in violation of local laws and regulations.
[00:34:17] Kevin: That kind of takes us into the topic of ESG. Maybe we can touch on that for a minute. We don’t own a lot of oil, gas, and chemical businesses across our various, strategies. How do you think about this company from an ESG framework? And I think maybe focus on the “E,” the environmental impact of the business.
[00:34:35] Matthew: Yeah, I think it’s an interesting question because the biggest issue that you have from that perspective is the carbon footprint of this business. It’s a petrochemical and refining company, it’s a retailer, and it’s a telco provider, and all of those require a lot of electricity, which, in the case of India, most of that comes from coal and natural gas and will for quite some time, so that’s something we watch closely.
[00:35:01] The interesting thing though about Reliance is because of the growth in the retail and telecom businesses, we see the profit pool from oil to chemicals, declining over time. So when we initially laid out the case in 2020, 2021, around 60% of the business was derived from oil, gas, and petrochemicals, in terms of the EBITDA contribution. Today, that’s already down to around 50%, and within the next five years, that should be below 40%. And meanwhile, we’ve seen the telco business go from, 14%, or thereabouts, to over 30% today, and we’ve seen the retail business go from, you know, 8% to 14% of consolidated EBITDA.
[00:35:46] So the broader ESG picture is naturally improving over time as the profit pool of the business shifts away from legacy oil and gas to telecom and retail. But as I mentioned, you know, any way you slice it, this enterprise growing is going to require more energy. And so in order to mitigate the carbon footprint associated with that growth, Reliance has taken a really thoughtful approach, I think, to leveraging its core competencies in project management and execution, and its cash flows to really drive the development of a green energy business. So backtracking for a second, in addition to all of the complexity of the business we’ve already discussed, they’ve also launched an initiative, and have earmarked $10 billion for this to date, to build solar photovoltatics [PV] manufacturing capacity, hydrogen electrolyzers, carbon fiber manufacturing for use in wind turbines, with the initial intent to help satiate captive demand across its various business units. Today, Reliance is paying something on the order of 10 to 12 US cents per kilowatt hour for electricity across its business.
[00:37:02] With scaled photovoltaics and renewable energy, the company believes that it can actually get electricity costs down to something on the order of half of that. So there’s a very compelling business rationale to “go green” in this case that doesn’t exist in a lot of other markets. But as that plays out we think that that environmental footprint aspect of the ESG debate for Reliance will be ameliorated over time. And in that respect, the company has a very aggressive target for carbon neutrality.
[00:37:34] It’s targeting 2035 to be net zero carbon, which is, not incidentally, 15 full years ahead of India’s target as a nation. So I guess to sum up, this is a business that’s making significant investments to improve its carbon footprint, and the thing as an analyst that you’re concerned about is that that agenda takes precedence over the profitability of the business, and its ability to grow…
[00:38:06] In this case, because of the unique nature of Reliance’s business and its vertical integration and its core skillset and project management and execution, there’s a very compelling business case to improve that carbon footprint. And I think that makes Reliance unique, in any market globally,
[00:38:29] Kevin: And yeah, so that’s the economist incentive question. And it sounds like their incentive is still the profit motive, which is what you want to see. Are they overbuilding the capacity so that there’d be a benefit to the Indian consumer as well, or to the overall Indian energy space?
[00:38:44] Matthew: So I think that’s what’s really compelling about the story here…so, you know, backtracking, I spent almost 10 years covering energy, everything from exploration production companies to major oil and gas companies to oil services companies, and even I spent a lot of time looking at renewables. And I think we’ve always, at Sands Capital, had a bullish outlook for unit growth across renewable energy sources.
[00:39:11] The issue that we’ve always run into at one point or another is it’s a highly commoditized supply chain. And while there’s a ton of unit growth, we’ve really struggled to identify investible opportunities that can grow profitably and that can be compelling investments for our clients. Reliance is a fascinating case study in that, because of the vertical integration, because of their core skill sets, and because of the nature of their business, and as energy consumptive as it is, they have a huge captive energy demand that they can use to build a manufacturing business, and then ultimately begin to service demand, not just outside of Reliance within India – i. e. selling, you know, solar modules to, other enterprises within the country – but ultimately, because of the cost advantage that we think that they have in India, because of their vertical integration, relative labor costs, and their proximity to other fast-growing markets, we think that they can potentially develop that into a large business on a global stage.
[00:40:28] The jury is out in terms of how big that business ultimately gets, and frankly, we’re not underwriting success there to any great degree in our models today, but it’s a clear vector of growth that could materialize over the next one or two decades.
[00:40:45] Kevin: That’s a really interesting story, and it sounds very consistent with the way they’ve operated historically, you know, not just being the beneficiary of change or kind of seeing where the puck is going, but actually driving the puck forward, being the key enabler of that change. So it’ll be interesting to watch.
[00:41:01] Matthew: So Kevin, to put that in perspective a little bit more, every year Reliance uses the same amount of energy as about 5 million U. S. homes. it’s a massive amount of captive energy that they need to address with renewable energies. And that gives them a real opportunity to piggyback a manufacturing business on top of that captive energy demand. So when you think about India at a higher level – going back to why we think it’s such an attractive market from a macro perspective – as the quality of life improves, India’s energy demand is likely to increase from around 12, 000 terawatt hours today to, over 26,000 by 2050. That is a massive amount of incremental electricity demand – that’s around the equivalent of 900 nuclear power stations today, you know, average-sized 2 gigawatt units.
[00:41:55] And addressing that is going to require a lot of incremental capacity. And given the environmental issues we’re talking about, much of that is likely to come from solar PV, wind, and a variety of other sources. But it offers Reliance a huge latent opportunity to go after with the renewable energy businesses that it’s developing as a leader in that supply chain.
[00:42:20] Kevin: Let’s stay on ESG for just a little bit longer. You know, this is a family-run business. Mukesh Ambani recently, I know, appointed his children to the corporate board as part of the succession plan. We’ve owned family-run businesses before, some successful, some not so much. How do you think about that from a governance perspective?
[00:42:42] Matthew: Yeah, absolutely. You know, I think, like a lot of businesses in India, Reliance is a family-controlled entity. Mukesh Ambani, the current Chairman and Managing Director, instrumental in its growth since taking the reins from his father, and has been clearly wildly successful in managing the business over time…
[00:43:02] Part of our diligence on this business, and one of the real risks we saw out of the gate was exactly this. You know, this is a family-controlled enterprise, and succession planning is critical because it will continue to be a family-run business. So one of the aspects of the diligence we focused extensively on when we were doing the initial work was the quality of Mukesh Ambani’s children as managers and as leaders of the organization.
[00:43:27] But beyond that, the breadth and depth of talent within each of the operating units. And I think the thing that gave us the most comfort around this idea of governance, leadership, board structure, the degree to which the Ambani Family exerts control over the enterprise, is that there is a very broad and deep bench of talent across this organization, and ultimately, that’s who’s executing on the ground. And we don’t expect to see any change in that respect on a forward-looking basis.
[00:44:01] So each of the three family members appointed to the board are competent in their own right, and they’ve demonstrated that, but they’re supported by a massive team of talented people who are executing day to day.
[00:44:14] Kevin: Okay, excellent. So, I think an interesting story related to the research process here is that you started looking at this business, and you first recommended it in January of 2021, so you must have been looking at it, you know, at least a year before that, which would have been kind of peak pandemic, travel shut down, that kind of thing. Walk us through how you researched this company leading up to that recommendation. If, in fact, you were doing it from your home office.
[00:44:43] Matthew: Yep. Yeah, I was doing it from a windowless home office. But luckily I’ve had the benefit of working with a number of colleagues who have spent a lot of time in India over the last decade and each of them was very closely monitoring and plugged into the work we were doing amidst the pandemic when travel was limited and we couldn’t get boots on the ground in India. But in addition to having folks with a lot of experience on the ground in India, we’ve also had folks looking at businesses that have competed in business spaces where Reliance has a footprint today.
[00:45:21] So whether that’s things like Titan, Britannia in consumer [sector], HDFC, Asian Paints in the industrial space, we’ve spent a lot of time very deep in business spaces that matter to Reliance in terms of providing insight into the consumer, into market dynamics. And we were able to leverage those insights in getting to a conclusion, on Reliance. And then as soon as India opened up, of course, I got on the first flight to Mumbai and did some work on the ground to enhance my own understanding of the country at a very granular level.
[00:45:58] Kevin: Did anything change? Did any of your kind of thesises developed during the pandemic shift?
[00:46:06] Matthew: Well, I would, yeah, Kevin, no, I would say I think the time on the ground was very confirmatory of our investment thesis, unsurprisingly so, given the expertise that I had with my colleagues during the initial research process.
[00:46:19] I think the thing that stood out to me the most throughout the course of this – mostly with the retail business – but throughout the course of a number of store tours, consumer surveys and panels, talking to consumers in India, was really the amount of value consciousness that there is in Indian consumer culture. You know you’re talking about an average consumer that has 2,500 of income in any given year, so value matters a lot, and it just reinforced to us, I think, one of the key competitive advantages of Reliance, which is their ability to offer high quality branded and private label products that are widely available at very competitive prices relative to the products that a lot of these consumers are buying from the informal market that dominates retail within the country. And I think in that sense, I came away with a much more tangible, visceral sense of the value that Reliance Retail in particular is bringing to the Indian consumer.
[00:47:26] Kevin: So let’s see, one question that does pop into my mind, but we use certain categories to organize the businesses that we own: “hyper-growth,” “classic growth,” “duration.” Is this, does this fit nicely into any one of those buckets or does it kind of span a number of them?
[00:47:42] Matthew: No, I think, you know, we would characterize this generally as a “classic growth” business, Kevin, but with some pockets that clearly look a lot more like, “hyper-growth” to us. Like for instance, the retail business is growing at multiples of overall consumption in India, at this point. The telecom business has been growing rapidly in recent years and there’s an expanding digital ecosystem that’s being built on top of the company’s core telecom assets that’s growing rapidly as well. Everything from over-the-top content to a variety of digital services that span everything from educational technology to telehealth.
[00:48:24] And all of those services are growing rapidly, but they’re not at a scale yet where they’re moving the needle for the company overall into hyper-growth territory. This is a classic growth business because you know, 50% or so of earnings coming from petrochemical and refining are growing at GDP-plus rates. and that’s unlikely to change anytime soon. So, as it relates to those assets, our focus is really just ensuring that the company is prudently allocating capital in a disciplined manner and they’re not investing at the wrong part of the cycle, which is a painful lesson learned from my history in the energy sector.
[00:49:05] Kevin: Yeah, well, that’s, you know, lessons learned are kind of the key to success in the future. So you know, they’re important. One question we talked about this at the beginning of the podcast, or you mentioned it, you know, kind of cooperation with the current government. How important is it that the BJP [Bharatiya Janata Party] stay in a leadership role to Reliance? Are they able to kind of pivot to the next party if that’s the case?
[00:49:32] Matthew: Well, to our knowledge they have relationships across the government. They have not played favorites, so we don’t view that as a material risk at this point, but it’s something that we’re watching closely, and we’ve got a number of colleagues here at Sands Capital who are intimately familiar with the workings of Indian politics and are well-placed to give us early warning signs if it looks like Reliance’s relationship, or stature, vis a vis the Indian government, is impeded in one way or another.
[00:50:06] Kevin: Another question just in terms of risk, thinking about this company as a pretty tightly integrated collection of businesses right now, or business lines…maybe not tightly integrated, but there are connections between them, believe it or not, and you mentioned this already, the petrochemicals business does have some impact on the retail business, at least in terms of the manufacturing component.
[00:50:27] But history has suggested that conglomerates over time diversify themselves out of business. You know, there’s a notorious business in the United States that goes by two letters of the alphabet, which will remain nameless, but it’s a shadow of its former self under previous management – is that a risk for this business? Could they maybe put their hands into too many different business lines?
[00:50:52] Matthew: Yeah, I think you’re absolutely correct and I think that the company is acutely aware of this and taking a thoughtful approach. If I were to guess within the next five or 10 years, there will not be one Reliance Industries as a traded entity. You’ll likely have a petrochemical and refining business, the new energy business will still be affiliated there, but we expect to see over time, the telco and retail assets ultimately spun out and separately traded, once they get to a point where they can generate sufficient cashflow on a standalone basis to fund that growth.
[00:51:30] Until we get to that point, we’re dealing with a conglomerate, but to your point, we think ultimately these businesses are going to act much more optimally if they’re focused as standalones, and there have been hints from the company over the last several years that that is likely the line of travel, so retail will be separate from telco, will be separate from the traditional energy businesses and new energy. The one piece that likely does need to stick together, at least for the next decade or so, in our view, is the oil gas chemicals and new energy piece, because there are some very powerful synergies between those businesses that would dictate that that is likely better run as a consolidated enterprise as opposed to distinct units.
[00:52:20] Kevin: Yeah, that makes sense, and it seems to me in the history of the business, they have the discipline to shut down or divest nonperforming business units if necessary.
[00:52:27] Matthew: You know, it’s interesting, Kevin, as successful as the business has been on the whole over the last several decades, like any enterprise, they’ve made some missteps. Like if you look at upstream oil and gas, Shale in the US did not work, and they invested at the exact wrong point in the cycle, but they cut ties with that business over the last several years here, realizing that it was not going to be a strategic pillar and a growth engine for the company. And they’ve moved on and most importantly, they limited the amount of capital that they allocated to that initiative. So they are not opposed to winding down businesses that just don’t work, or don’t fit with where the strategic vision of the company is headed.
[00:53:14] Kevin: Am I right that they had a kind of a traditional financial services business as well?
[00:53:18] Matthew: Yes, Jio Financial Services was just spun out as a separately traded entity. It was a very small percentage of Reliance’s overall revenues and earnings, but that is now trading separately.
[00:53:30] Kevin: Excellent. Well, again, like I said, you know, we can continue to talk about this for another couple hours because there are so many different strings we can pull on this. I think an extremely interesting and diverse business, but maybe we’ll wrap it up here and ask you to give us some of your final thoughts. What did we miss? What didn’t we talk about? Or maybe give us the big picture… wrap it all up into a nice package for us at the end here.
[00:53:52] Matthew: Yeah, I think I’d probably start with where you began the discussion, which is we think that Reliance has the potential to be the most important business over the next several decades in what we believe to be one of the most important and exciting and dynamic economies in the world over those decades. It’s exposed to a number of growing consumption buckets, and we also think that it’s got a key role to play, not just in India, but globally in terms of the environmental aspect, and moving to a lower carbon footprint and ultimately exporting technology that can be used to that end in other markets globally.
[00:54:33] We talked a little bit about the mechanics of how that’s likely to play out in India, but unlike a lot of the other things that at least I’ve studied personally in the clean energy and renewable energy space, there’s a very compelling business case here, as that transition plays out.
[00:54:51] Kevin: Excellent. Well, thanks Matt. This seems to me to be the kind of company we’ll wanna check back in with you…maybe a part two on Reliance to see how things are developing because I think five years from now, as you suggested, it’s gonna be a very different business, at least in terms of the sources of revenue and earnings. It’ll be very interesting to see how that all plays out.
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed are current as the episode date and are subject to change. This material may contain forward-looking statements, which are subject to uncertainties outside of Sands Capital’s control. The securities identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio. You should not assume that any investment is or will be profitable. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. For more information, including a full list of portfolio holdings, please visit our website at www.sandscapital.com.
As of October 31, 2023, Reliance Industries was held in the Emerging Markets Growth and Global Shariah strategies. Titan was held in Global Growth, Emerging Markets Growth, and Global Shariah. Britannia was held in the Emerging Markets Growth strategy. Asian Paints was held in the Global Growth, Emerging Markets Growth, and International Leaders strategies. HDFC Bank and HDFC Life Insurance were held in the Global Growth, Global Leaders, Emerging Markets Growth, Global Focus, and International Leaders strategies. WhatsApp is owned by Meta, which is owned in the Select Growth, Technology Innovators, and Global Shariah strategies.
Jio Financial Services, Walmart, and Costco are not owned in any Sands Capital strategies.
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The featured podcast portfolio companies represent a subset of Sands Capital holdings that illustrate the types of businesses in which we typically invest. The series uses rotation whereby companies are selected to highlight different sectors and geographies.
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