Is underperformance to continue?
Reliance has been stagnating for quite some time. It reaches the 2200 levels and then we see a draw down again happening. So, clearly it is looking for the next big catalyst. The Just Dial acquisition did not actually enthuse the Street that much. What the Street will look at, especially in Jio, is any move to hike ARPUs by any action. We saw a bit of action by Bharti but that was very little, it was addressing only 5% of their total clientele which accounts for about 20% of the revenue when they hiked the post paid plans minimum sizes. So something has to happen.
Secondly, there has to be traction on their platform businesses, on the ecommerce businesses, they have been acquiring companies but given the sheer scale of Reliance, those are still very small and the street is waiting for that. The O2C business did better than anticipated but the catalyst will be whether the Saudis come in or not and whether they hive off a portion of that business to reduce the gross level of debt.
Net debt is now negative but the gross levels are still quite high and that means the free cash flows for the company are not what the street is happy about, Those were the big issues. And of course, retail was in line with the other retailers because of lockdown 2 saw the retail numbers going down. Those will eventually pick up. Meanwhile, the margins were lower.
Overall, how I would approach Reliance is that the ecommerce part as well as the retail part are the drivers. If we can get more clarity on those and we see some traction happening; plus I would look at the renewable energy project that was announced in the AGM. It is a full value chain, right from making panels to sourcing the raw materials fabricating and then being a big renewable energy producer. Let us see what happens there. It is early days yet. But I would say it is the top company in our markets. Fund managers stay invested in it and the runway is very huge.
If you compare it to Alibaba at its peak, then there is a seven-eight times kind of potential because Indian consumption will converge to the Chinese consumption. We are leapfrogging some of the stages. Reliance has also led the leapfrogging of some of the stages and that will lead to value unlocking. Whether that happens in two years or three years or five years is difficult to say. But on a long term basis, that is the story one has to look at.
What would be the fair value for Zomato? Were you a buyer in the IPO?
No, I did not. I go by cash flows but I am a minority, So, I am not asking anybody to follow my investment style. Right now, you have to look at it as a bet on trying to find the next Amazon, next Alphabet, next Facebook.
I was laughing when I saw Aswath Damodaran’s valuation for Zomato. He had done the same when the Facebook IPO came one generation back and literally Facebook has laughed him off all the way to its trillions of dollars of market cap. These are really growth businesses and very difficult to value on traditional parameters. One has to value them on the kind of growth that they will get in, the number of customers that they will get.
I will give you a small example. We saw what happened in Ed Tech over the weekend. The news has come that the Chinese posted one notice that food delivery platforms should treat their delivery boys well and a few more things they have said and my tone has gone down 15% just on one note. That is the risk.
When you are an asset light app-based platform business, somebody with a deeper pockets can come in and take you out. It will not happen now with the kind of dominance that Zomato and Swiggy have got and the kind of Orchids chest that they have created.
The second is regulatory, the third is something fundamentally changing itself. If some new technology comes in or there is some delivery by which I mean the company there are some 20, 30, micro deliveries come up in all the major markets who start servicing restaurants directly. It is difficult to conceive but there is a big possibility something could come in and we have seen that with the Chinese tech, That is a big risk.
Stephen Roach called it the start of the new cold war and regimes like China, North Korea and even Iran take positions in the markets and then they take out regulatory moves like this. So they make money both ways. First, they have allowed their companies to go and list and create trillions of dollars of market cap. There is $15 trillion of global money invested in Chinese bonds and now in the cases like Evergrande and others, even their state owned bad banks, the Chinese government has not been stepping in.
So it is very interesting to watch. I would say watch your risk appetite, we do not know who is the next Amazon or next Alphabet. It could be Zomato, So take a small position and wait it out. That is what most investors are doing. Otherwise on a cash flow basis, at 42 times sales, what are you really valuing this platform for?
