admin
January 29, 2015
Varun Jain, The Economic Times
New Delhi , 29 January 2015
As
online shopping grows in India, deal sites that offer cash-back
and discount coupons have emerged, helping retailers to add customers
and widen the market. E-commerce entities such as Amazon have
started to realise the importance of these deal sites and the
impact they can have on business.
For large e-commerce players, partnering with discount coupon
and cash- back sites is a way to gain a larger market share and
build competitive advantage, said Ravitej Yadalam, CEO and founder
of Pennyful.in, a coupon and cash-back shopping website. For smaller
companies, affiliate marketing, as the concept is known, is a
way to garner brand recognition and a risk-free and cost-effective
channel for customer acquisition and retention, according to Yadalam.
Anisha Singh, CEO and founder of mydala.com, a Delhi-based coupon provider, says it is a good time for the online discount marketing industry in India. According to her, "a report by Motilal Oswal has stated that the online coupon/discount marketing segment has flourished alongside the surge in e-commerce in both US and China."
There’s no unanimity about the impact of deal sites and some say that they benefit mainly small and relatively new retailers.
Couponing websites are most useful for those retailers and service providers who are new, local, or too small to compete with large e-tailers in driving traffic to their websites, said Devangshu Dutta, chief executive officer at Third Eyesight, a consulting firm.
"In many cases, the benefiting merchants may not have any online presence at all, and the couponing site provides them a relatively low-cost, low-commitment model to create a presence online," said Dutta.
Amazon, the world’s largest online retailer, has tested the concept – the company refers to affiliates as associates — in the global market and has a different take.
"Associates are a great platform that we have had for 20 years and we continue to invest in them. When it comes to India, it is going to be one of our very important channels," said Samir Kumar, director of category management for Amazon India, acknowledging that deal sites are an efficient way to get traffic to its platform.
Flipkart, the other major e-commerce player in India, declined to respond to e-mailed questions.
CouponDunia, a discount coupon site, pushes over Rs 20 crore worth of sales to merchants every month, according to founder and CEO Sameer Parwani. With a monthly visitor rate of 4 million and an e-mail subscription base of 3.7 million consumers, it directs a substantial rate of traffic to partner websites, says Parwani.
Mydala, which claims to have sales of 200,000 vouchers every day, enables revenue to the tune of Rs 400 crore per month for their partners, according to a company official.
Another deal site, CashKaro.com, manages over 2,500 transactions a day and has credited over Rs 4 crore of cash back to members, according to Swati Bhargava, a co-founder. It has enabled partners to generate Rs 150 crore since the company started in April 2013.
Given the boom in online shopping, turnover at deal sites has grown rapidly.
"Our overall business has been EBITDA (earnings before interest, taxes, depreciation, and amortisation) positive and has clocked in 600% growth in sales in the last two years…we are looking at increasing our merchant base to a million merchants in 2015 and coupons sales to increase to 8 million per month in March 2015," according to Singh of mydala.
Yadalam of Pennyful.in says the company’s revenue rose 2.5 times
year-on-year as of 2014 and its customer base is increasing by
150%.
(Published in The Economic Times)
admin
January 23, 2015
Sagar
Malviya, The Economic Times
Mumbai,
23 January 2015
Trent
Hypermarket — the equally owned joint venture between the
Tata Group and UK’s Tesco — plans to invest Rs 250 crore
as the only Indian multibrand retailer with foreign investment
aims to open more stores.
The planned expansion is likely to be seen as a test case for the ruling BJP’s stance towards foreign direct investment in the supermarket segment. The party’s stated policy is against FDI in stores selling multiple brands, but industry watchers and experts say the government is unlikely to meddle with Trent’s plan at a time when Prime Minister Narendra Modi is focused on bringing in investment.
Trent’s board has been authorised to raise up to Rs 250 crore through loans, guarantee, securities or way of subscription, according to a company resolution, a copy of which was filed with the Registrar of Companies earlier this month.
The board passed the resolution on January 5. In December 2013, the previous Congress-led government had approved Tesco’s application to invest about $110 million (Rs 680 crore at current exchange rate) in the joint venture.
Trent didn’t respond to an email seeking comment on its plans. Sources with knowledge of the matter said the company intends to add another five hypermarkets in 2015 to the dozen outlets it already has, but the main focus is on opening smaller convenience stores.
The previous government allowed up to 51 per cent foreign holding in multi-brand retail in late 2012 and said states can make the decision on whether or not to allow such outlets in their territories. But with main opposition parties, including the BJP, opposing the move as well as lack of clarity on some rules and stiff sourcing requirements made companies like Wal-Mart Stores of the US to stay away from making any investments in the segment here.
Tesco is so far the only foreign retailer that has invested here, and there were concerns about the new government’s position towards the company after the BJP won the 2014 parliamentary elections and some ministers made comments against allowing FDI in multibrand retail. But since the Tesco investment had already been approved and going back on that decision could hurt India’s image as in investment destination abroad, industry experts say Trent is unlikely to face any action.
"The BJP wouldn’t want to upset the applecart severely. While they may not be in favour of FDI in multi-brand retail, they might not roll it back with retrospective effect," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight. "BJP’s attention to FDI is mainly for manufacturing with retail being a small enabler. Also, food and beverages retailing is a local business and even a single state is large enough if there are constraints in other states."
Since four of the 16 Star banner stores operated by Trent Hypermarket were in Gujarat and Tamil Nadu — which were ruled by the BJP and AIADMK which were against FDI in the segment — these stores were divested into a separate Tata subsidiary, Trent-Fiora Hypermarkets. The new stores that the Tata-Tesco JV plans to open will come up in Karnataka, which is a Congress-ruled state.
(Published in The Economic Times)
admin
January 16, 2015
Rashmi
Pratap, The Hindu Businessline (BLInk)
New
Delhi, 16 January 2015
Manish
Gupta travels a lot as an executive in a multinational firm. Alongside
a universal adapter and shaving kit, his travel bag is never without
his favourite fairness cream and face wash. He has been hooked
to Emami’s fairness cream for men since 2005, when he was
still in college. His made-for-men face wash brand keeps changing
as he loves to try the many new ones flooding the market.
Gaurav Batra’s addiction to fairness cream is fairly recent. He began buying a men’s fairness cream after fights with his wife over emptying her tube of cream. His colleagues were candid about using men’s toiletries and that made it easy for Batra to jump on to the bandwagon. “It is no longer ‘unmanly’ to use creams and lotions. We also want to look good, much like women,” he says.
Consumers like Batra and Gupta are reinforcing what Emami discovered nearly a decade ago. In a 2004 study on the use of fairness creams in India, Emami found that more than one-fourth of the users were men, and they were using products marketed to women. Sensing an opportunity, in 2005 Emami was ready with the world’s first fairness cream for men — Fair and Handsome. The product is a market leader in the category today and gave an impetus to what was hitherto a latent market for manufacturers — male grooming products.
Research firm Euromonitor pegs the men’s grooming market at Rs. 4,300 crore by March 2015. This includes men’s toiletries at Rs. 2,500 crore (including deodorants at Rs. 1,800 crore), while hair, face and skin care command a relatively modest Rs. 700 crore. Together they constitute about one-sixth of the market for the unisex category. Marketers have been quick to spot the potential here.
“There is much more opportunity to have newer products in these categories. The market is definitely under-penetrated,” says Vineet Jain, General Manager-Marketing (Consumer Product Division) of Himalaya Drug Company.
Male market needs
Himalaya entered the men’s face wash segment in June last year after it undertook a study to find out why the face wash market was stagnating. “We wanted to understand why there were no new users in the face-wash category, where growth had slid from 33-35 per cent to 18 per cent,” he says.
The company realised that men hesitated to use the existing face-wash products as their needs were different — oil, dirt and pollution were bigger worries for them, whereas the women’s products were geared towards acne control.
With its men-specific focus, not surprisingly, Himalaya has already captured 7 per cent of the Rs. 157-crore men’s face-wash category within six months of launch. The face wash segment itself grew 57 per cent from Rs. 100 crore in FY 2014. “In the past few months, many brands have entered this segment,” Jain adds.
Emami director Mohan Goenka says the men’s grooming segment is one of the fastest growing in the personal-care space, consistently outperforming women’s categories. The categories are expanding too — deodorants, face wash and hair care (shampoos and hair-styling gels).
The Emami men’s range now includes the HE deodorant brand and the Fair and Handsome fairness face wash, which was launched last year. Himalaya is readying more variants for its face wash besides entering newer segments, the details of which it is not ready to share yet.
Goenka believes the factors powering this emerging market are both personal and economical in nature.
Ready to groom
Indian men today are increasingly conscious about their appearance. Additionally, young men in college are typically more willing to experiment with their looks. “Among college-going students, the desire to be seen as being on the cutting edge of trends and fashion, besides the classical need to be attractive to the opposite sex, is now finding expression through new product adoption,” says Goenka.
Agrees Himalaya’s Jain: “Our consumer research for men’s toiletries found that 68-70 per cent of students are buying from us, and the 15-24 age group is buying 80 per cent of our products. It supports our hypotheses that today’s youngster is not afraid of saying ‘I use a grooming product’.”
Goenka calls this the ‘legitimisation of men’s grooming’, long seen as an embarrassing activity kept under wraps. “This has been boosted by celebrity associations and endorsements of brands, and a high level of media exposure, besides the rise of aspirational brands in the men’s grooming space,” he says.
Seen from a consumer angle, Jain senses a growing desire to look metrosexual as more and more men are working with MNCs, travelling abroad and seeing this trend in other countries. “It has been supported by Bollywood. The acceptance of being metrosexual is very high now,” he adds.
Fair and Handsome gained a handsome market share when Bollywood heartthrob Shah Rukh Khan was its brand ambassador. Today it is the market leader in the category, commanding more than 50 per cent of it. Nivea too got noticed with actor Arjun Rampal as the face of its men’s range. “Our association with Arjun has given us a lot of eyeballs and is working well for us,” says Sunil Gadgil, marketing director at Nivea India.
In the absence of the first-mover advantage, Nivea believes its well-rounded portfolio will persuade the consumer to choose Nivea Men over others. Its products range from dark spot reduction moisturiser and oil-control face wash to deodorants and shower gels.
“We see ourselves as a challenger in a fast-growing market,” says Gadgil.
Mass of buyers
The market today is no longer confined to urban India, as rural consumers are slowly, but surely, opening their purse strings for personal care products. “The rural market is still in the early stages of penetration compared to a relatively higher urban penetration. However, early signs of adoption are all around: in men’s fairness creams, rural India has been growing significantly faster than urban India,” says Emami’s Goenka.
Himalaya’s Jain says only about 15 per cent of the market for unisex face washes is in rural India. In the case of men’s face wash too, the split is skewed 90:10 towards urban areas. But the growth is equal — at around 55 per cent.
“I don’t see any efforts by manufacturers to drive rural growth. Rural consumers have historically been looking for sachets and small tubes, and prefer basic benefit products. We still see men’s grooming products being targeted at higher value packs because urban India offers lower cost of distribution and higher sales,” Jain says.
And this is possibly where the challenge lies for this category of products. Devangshu Dutta, chief executive at Third Eyesight, says that the biggest barrier to adoption of male grooming products by the masses is the price point. “These are discretionary products; you can cut back usage easily.”
India is largely still a price-conscious market. “So the ability of a company to provide affordable options can drive usage in this category,” he adds.
As of now, the usage of male grooming products is dominated by higher income groups. “But the absolute number of these consumers is small. The bigger opportunity is lower down the pyramid. You need to have products that are mass and you need to have multiple products and brands in the same category,” says Dutta.
Gadgil adds that the challenge is really about offering the Indian male what he needs. His grooming needs are different from those of females, for whom skincare is already a part of daily routine and they have a higher level of engagement with the products. Men look for products that have utility. “There is still a lot of scope to address these needs,” he adds.
Jain sees a challenge in convincing men who are soap users to switch to face wash. But going by the history of personal care, that may not prove all that tough. The growth of deodorants, for instance, is telling — the male deodorant market is around Rs. 1,800 crore today, while it’s Rs. 1,000 crore for the female product.
Marketers see no reason why this trend cannot continue in the case of hair and skin care products. “A lot of consumer research has been done in the deo category and that is why companies are able to target barriers and fill the need gap. As more and more manufactures focus on other categories, find need gaps and fill them, other male grooming products will also proliferate rapidly,” says Jain.
It’s, obviously, all down to knowing what men want, really.
(Published in The Hindu Businessline – BLInk)
admin
January 12, 2015
Gulveen
Aulakh & Jayadevan PK, The Economic Times
Bengaluru/New
Delhi, 12 January 2015
Inside
a four-storey office in Noida’s Sector 5, Vijay Shekhar Sharma,
the founder of One97 Communications, pointed to a sign on the
glass wall of a conference room — "Go big, or go home,"
it said, adding, "One million orders a day will happen here
first. That’s our vow. That’s our game."
In the reception below, a dozen-odd job aspirants were waiting to be interviewed.
That was in mid-September. On Sunday, ET reported that Chinese ecommerce giant Alibaba is set to invest $575 million in One97 Communications-owned Paytm at a valuation of over $1.9 billion. A deal could be announced in the first week of February.
In the weeks leading up to September, Sharma, 38, had doubled down on hiring for Paytm, ploughing in profits from One97 Communications, a mobile value-added services firm, to build up its unit into an online marketplace. "We’ve bet the whole company on it."
"Every rupee we had was being used to grow Paytm," Sharma said. To compete with the likes of Amazon, Sharma needed more money and a strong strategic investor.
That’s exactly what seems to have happened over the past few days, making it the fastest Indian startup to cross billion-dollar valuation. Paytm, which began as a mobile recharge and utility bill payment service in late 2010, quickly morphed into a fullblown ecommerce marketplace similar to Amazon and Flipkart, only focused on mobile right from the start.
Many employees own equity in Paytm
In October, Sharma set in motion a massive fund-raising exercise that was to last several months and culminate in a deal that would give Paytm the money and the muscle. Around the same time, he inducted veteran Silicon Valley investor Mike Levinthal onto the board, a US-based partner at a venture capital firm told ET.By the end of January, Chinese entrepreneur Jack Ma, who built the world’s most valuable ecommerce company Alibaba, is likely to make the deal official. Sharma declined comment but at least two sources said that in October, he met top executives from Japan’s SoftBank, Singapore government’s Temasek Holdings and Chinese ecommerce firm Alibaba.
The companies couldn’t be immediately reached for comment.Alibaba and Alipay will have one member each on the company’s board, besides two founder directors, one of which will be Sharma, said a source close to the developments. Of the current 2,000-strong team, about half hold equity in the company. About 100 executives in the senior management and tech teams have shares worth at least Rs 1 crore, said another person. ET could not immediately verify these claims. The company is learnt to be issuing new shares so all current shareholders dilute their stakes, after which Alibaba and Alipay are likely to get an equal split of equity following the infusion of $575 million.
As a company, Paytm has evolved from when it was first launched in December 2010. "At one point of time, we looked like a recharge portal, then a utilities payment service, now we are a marketplace," said Sharma. The company motto this year, printed on its 2015 calendar, is "Game on!" On New Year’s Eve, Sharma threw the "biggest party in town" for employees with local band Euphoria performing. He was back at work early next day.
Co-workers know him to be perpetually in motion, putting in long hours at work alongside his team at the Noida office, which does not have any cubicles. "I get at least three emails where a customer satisfaction issue has been highlighted. He (Sharma) personally looks at all escalations," said Amit Lakhotia, vice-president of business at Paytm.Having skydived from a plane in Australia and rafted through treacherous rapids in Rishikesh about 20 times, Sharma is an "adventure junkie", always looking for the next big adrenaline high, said people close to him. Sharma and his friends also like going on road trips across Europe, one of them added."I’ve known him for seven-eight years and I can tell you his mind is all over the place all the time. It’s a mark of impatience, of getting things done, which is needed when you’re leading a fast-growing company.
At times, conversations can go in many different directions — he has so many different ideas," said a director at one of One97’s companies, requesting anonymity. Sharma was born to Sulom Prakash Sharma, a biology teacher who retired as the principal of Agrasen Inter College in Harduaganj, a small town near Aligarh in Uttar Pradesh. His mother was a housewife and Sharma grew up in a studious atmosphere at home. He was a top scorer in school and was one of the youngest to graduate from Delhi Engineering College in 1998.
He started his first venture, web solutions firm XS Corps, while finishing his electronics and communications engineering course. A year later, in 1999, he sold the company to US-based Lotus Interworks LLC. Over the next few years, before starting One97 in 2000, Sharma was part of a number of companies including Riverrun Software Services Group, Inter Solutions Software and Startec Global Communications, where he was chief technology officer. The companies focused on design and development of of various products and applications for the technology, media and telecom industries. Sharma is one of the few startup bosses who have mentored other startups during their early days.
Gaurav Dahake, founder and CEO of BuyHatke.com, recalled that Sharma guided the IIT-Kharagpur alumnus when he approached him through a business networking site and connected him to Pratyush Prasanna, vice-president at Paytm, from the same school. Prasanna was founder and CEO of Plustxt, a privacy enabled text messaging system in seven Indian languages that was acquired by One97 in 2013. "He is very approachable. I simply left him amessage on a community on Quora saying ‘How do I get in touch Vijay’ and I got a prompt reply from him," Dahake said.Sharma is popular among the startup, venture capital and emerging business communities as passionate, aggressive, being a stickler for detail and consumer-centric.
"He spends a lot of time on the design and user interface of Paytm, the way it should look and feel to the end consumer," said Lakhotia, who has worked with Sharma for the past two-and-a-half years. To be sure, even with a combination of Sharma’s experience in dealing with the Indian consumer and Alibaba’s money and experience in China, it’s not going to be an easy run. Flipkart, Amazon and Snapdeal, three of the largest Indian ecommerce companies now, have significant market share and access to capital.
Paytm is likely to differentiate itself by connecting millions
of Chinese merchants on Alibaba’s marketplace to the Indian market
and the consumer in its home country to a wider variety of products
available on the marketplace. But there may not necessarily
be an automatic match, said an expert. "India has different
needs from China so you can’t just port something from China and
bring it here. Indian banking systems are also regulated differently
and I’m not sure how much of this synergy will actually apply,"
said Devangshu Dutta, CEO of retail advisory Third Eyesight.
(Published in The Economic Times)
admin
December 26, 2014
Nevin
John, Businessworld
New
Delhi, 26 December 2014
The Annual General meeting (AGM) of Reliance Industries (RIL)
on 18 June 2014 was significant. RIL chairman Mukesh Ambani’s
wife Nita was inducted to the board of the $67 billion petroleum
giant with the overwhelming support of shareholders. She is the
first woman from the family to join the key decision-making body.
Four months later, on 11 October, RIL subsidiaries — Reliance
Jio Infocomm and Reliance Retail Ventures — announced the
appointment of Ambani scions, daughter Isha and son Akash, to
their boards.
The induction of family members to the boards of group companies
comes at a time when RIL, India’s largest private company
by revenue, is in the midst of its largest investment cycle. The
company will pump in Rs 1.8 lakh crore into a large pet coke gasification
plant, a petchem cracker unit, a country-wide fourth-generation
(4G) digital network and India’s largest network of retail
stores spanning ‘value’ and ‘speciality’ formats.
Again, while the telecom and retail businesses hold promise, many
of the group’s businesses are struggling.
The hydrocarbon exploration and production (E&P) business
is falling apart, with no significant recovery in sight. Anomalies
surrounding gas pricing and the fast depleting Dhirubhai-1 and
-3 gas fields — due to geological complexities in the Krishna
Godavari (KG) basin — are stifling the growth prospects of
the company’s upstream business. Even the organised retail
business is yet to come anywhere close to the projected revenue
growth, while the broadband foray has been delayed on account
of the extensive technical work involved in creating a pan-India
network.
That sure is a lot to handle for the Ambani family, which faces
the tough task of rebuilding the company into a global force to
be reckoned with.
Spending Spree
Based on RIL’s March 2014 annual report, Moody’s estimates
that the company has invested around Rs 40,000 crore in Jio, with
Rs 30,000 crore more to be pumped in over the next two years.
Jio, the only private player with broadband wireless access (BWA)
spectrum in all 22 telecom circles, is expected to provide high-speed
broadband connectivity and rich digital services on a pan-India
scale.
In 2010, the company bought 20MHz of spectrum in the 2,300MHz
band for Rs 12,847 crore. Three years later, in October 2013,
it received the unified licence — against a one-time entry
fee of about Rs 1,673 crore — for all the 22 service areas
to offer all telecom services, including voice telephony. This
February, adding to its broadband reach, it acquired more spectrum
in the 1,800MHz band in 14 circles for Rs 11,054 crore.
To ensure high data transmission speeds, Reliance Jio has laid
around 100,000 km of optical fibre across the length and breadth
of the country. In areas it doesn’t cover, the company has
signed agreements with Bharti Airtel, Reliance Communications,
BSNL, Tower Vision, ATC India, Viom Networks, Bharti Infratel,
Indus Towers and GTL Infrastructure that will allow it to share
tower infrastructure, among other things.
According to a Credit Suisse report, the company has installed
approximately 32,000 long-term evolution (LTE, which is a technology
standard for high-speed wireless data networks) base stations.
It has signed on Samsung Electronics for supplying equipment for
60,000 base stations and is expected to sign an agreement for
an additional 50,000-70,000 base stations soon, says the report.
In all, the number would be on a par with big operators such as
Bharti Airtel, Vodafone India and Idea Cellular.
Work In Progress
Ever since broadband licences were handed out, the industry,
Jio’s rivals, analysts and consumers have never ceased to
speculate about the launch of services. But Mukesh refuses to
set a deadline for his team. “Broadband is going to be a
big stroke. He wants his team to be free from compulsions,”
says a company executive.
At the 2013 AGM, Mukesh announced that the launch of Jio’s
services would take place in 2014. But in the latest meeting,
he extended the date and said services would only start in 2015.
According to him, the project would cover all states — around
5,000 towns and cities, accounting for over 90 per cent of urban
India, and over 215,000 villages. The target is to cover over
600,000 villages. The company’s acquisition of Network 18,
a media group, is said to be helping in the creation of content
for its 4G services. In the midst of Jio preparing to launch its
services, a controversy erupted recently when the Comptroller
and Auditor General (CAG) of India reported that RIL had benefitted
unjustly to the tune of Rs 22,842 crore in the grant of 4G licences.
Despite repeated attempts by BW | Businessworld, RIL did not revert
with a response to BW’s queries.
The spectrum issue aside, among other things working against the
company is the price war in the telecom space. Bharti Airtel is
already offering high-speed 4G packs at rates lower than those
of 3G plans, signalling a tariff war on the mobile data front.
Anil Ambani’s Reliance Communications, on the other hand,
has launched ‘Pro 3’, an unlimited data plan for Rs
999 a month, with speeds of up to 14.7 Mbps, enabling lightning-fast
data streaming. Handsets are another pressing issue for the company.
RIL shareholders still remember the Monsoon Hugama of 2003. Then,
as part of Reliance Infocomm’s cellular services, the company
gave away mobile handsets for Rs 500 along with a CDMA connection.
The customer base skyrocketed within months of the launch. Though
CDMA as a technology failed to catch up with GSM, Monsoon Hungama
went down as a super success.
Jio has to come up with something similar on the gadget front.
The Credit Suisse report says smartphones below $100 could become
a reality and prove disruptive in the market. Jio is already testing
its services through its products at Navi Mumbai and Jamnagar.
Also, it has written to the Department of Telecommunications for
a network test to be conducted along with security agencies.
For The Long Haul
The other area where RIL is looking to make its mark is retail.
It was Mukesh’s idea to enter the sector, essentially with
the aim of expanding the company’s revenue base. But Reliance
Retail, which opened its first store in 2006, has not contributed
even half a per cent to RIL’s revenues in the past five years.
The company has, however, emerged as the largest retailer in the
country after the degrowth of other big names such as Big Bazaar,
More and EasyDay. Reliance’s various speciality formats —
Trends (apparel), Digital (consumer durables and information technology),
Footprint (footware) and Fresh, Mart and Super (value formats),
have achieved the leadership position in their respective segments.
In its initial years, Reliance Retail had more than its fair share
of problems from state governments and kirana traders. In excess
of 50 licences and permits are needed to set up a store in India.
So, setting up a pan-India supply chain and store network wasn’t
a walk in the park. Mukesh stayed the course and his persistence
began to pay off. The business now spans 2,000 stores, covering
an area of 11.7 million sq. ft across 155 cities. Last year, 367
new stores were added — effectively one store every day!
In the first half of the current financial year, the revenue from
retail stood at Rs 8,166 crore — up 17.3 per cent from the
same period in the previous year. The earnings before interest
and taxes (EBIT) went up more than two times,to Rs 180 crore.
In the last fiscal, the retail business posted revenues of Rs
14,496 crore and profit before depreciation, interest and taxes
(PBDIT) of Rs 363 crore.
“In the coming years, retail will emerge as a major growth
engine for our consumer business and for Reliance by creating
significant societal value,” said Mukesh at the AGM. Reliance
Retail’s projection on the revenue front for 2017 is Rs 40,000-Rs
50,000 crore, which S.P. Tulsian, an independent analyst, says
will be tough to achieve.
Devangshu Dutta, chief executive of retail consultant Third
Eyesight, says RIL is in retail with a long-term plan. “They
have the cash flow to stay put in the business and experiment
with different business models. They recently rationalised their
stores — closing non-profitable ones and opening at other
locations. Even the top team changed several times as part of
the experiments.”
In 2012-13, the retail business’s earnings before interest,
taxes, depreciation and amortisation (EBITDA) turned positive
for the first time. But Tulsian doesn’t buy it. “I am
not very excited about it (positive EBITDA) because interest and
depreciation are major factors in the retail business. Reliance
has a huge interest burden. Since it is a cash-rich company, it
doesn’t have an interest in counting the liability of the
retail business or is not factoring in the liability,” he
says.
Arvind Singhal, chairman of Technopak Advisors, justifies the
numbers and says the return will not be robust if retailers invest
in size and scale. “Reliance has created solid back-end resources
to travel the distance.”
Lately, the organised retail market has not been doing too well.
Very few Indian retailers have increased the number of stores
in the past four years; instead, many have cut down. Future Group’s
Big Bazaar and Aditya Birla Group’s More have shut down 30-50
per cent of the value format stores and are now focusing on the
high-margin supermarket and hypermarket businesses.
Since RIL is number-focused, it continued adding floor space.
This could turn out well for the company in the near future, unlike
the investments in some of its ‘successful’ businesses
that are experiencing a downturn.
Pain Point
RIL entered the E&P business in line with the backward integration
concept propounded by founder Dhirubhai Ambani. Since its very
first extraction of oil from KG-D6, the business offered humungous
margins to the company. But in the last two years, the production
of natural gas has witnessed a steady decline. The revenue share
from exploration and production fell to 1 per cent in the last
financial year from 5 per cent in 2010, while the EBIT plunged
to 7 per cent from 27 per cent.
In the first quarterof the current financial year, the average
production from KG-D6 stood at 13 million standard cubic metres
a day (mscmd), against the projected production of over 80 mscmd.
In 2010-2011, the revenue and EBIT from the E&P vertical was
Rs 17,250 crore and Rs 6,700 crore, respectively; both fell to
Rs 6,068 crore and Rs 1,626 crore, repectively, in 2014.
An RIL press release calls E&P highly complex operations,
having a low success rate , saying “initial interventions
have not met expectations.” But, statistically speaking,
RIL made profits in this business too. Of the nearly $10.5 billion
invested on productive offshore assets, the company has already
recovered partial costs through the sale of gas. In addition,
it raised $7 billion by selling its 30 per cent stake in its upstream
assets to British giant BP in 2011.
While its D1 and D3 discoveries have no scope of producing gas,
RIL has decided not to make further investments on developing
the R-series, MJ1 and satellite fields till the government gives
its nod to the ‘market price’ — linked to the international
price of crude — for gas.
According to the Rangarajan Committee report, while the UPA government
had approved doubling of gas prices to $8.4 per mbtu, the Election
Commission stalled the move during the elections, leaving it to
the new government to decide. The NDA government, on its part,
sanctioned a lower price of $5.6 per mbtu (up from $4.2), making
deepwater exploration unviable.
The new government also imposed an additional fine of $579 million
on RIL for reduction in gas production, taking its total penalties
to $2.4 billion. The company has begun arbitration proceedings
to seek redressal.
Tulsian says there is no logic to increasing gas prices since
the contractor has recovered costs. “BP’s investment
in these fields is a big mistake. It cannot recover the cost….
They (RIL and BP) are trying to link their cost recovery to gas
prices, which is wrong.”
Considering this, BP, in the last quarter, wrote down the value
of its investment in KG-D6 by $770 million. “The charge arises
as a result of uncertainty in the long-term gas price outlook,
following the introduction of a new formula for Indian gas prices,”
the company said in a statement.
But RIL’s view is that it, along with its partners, spent
$7.4 billion on developing non-KG-D6 blocks and on exploration
work at relinquished blocks. “In case prices are to be fixed
on the basis of cost of production, the additional cost of $7.4
billion will also need to be reimbursed,” the company said
in a report titled Flame Of Truth. Besides, the interest burden
on its investments spread over 10 years is yet to be recovered,
says a senior company executive. V.K. Vijaykumar, investment strategist
at Geojit BNP Paribas Financial Services, says the market’s
short-term worry is gas production from KG-D6 and its price. “The
revenue from shale gas is the cushion for RIL when KG-D6 underperforms.
But shale gas will not become a substitute in the long run,”
he says.
Big Money-spinners
RIL’s last major asset creation happened five and a half
years ago when it developed India’s largest offshore hydrocarbon
block, KG-D6, along the Andhra coast, and commenced production
in September 2008. Three months later, it completed the construction
of the second refinery at Jamnagar in Gujarat.
The only noticeable asset addition after that was the acquisition
of stakes in shale gas blocks in the US. In 2010, RIL invested
in shale gas, when there was no clarity about its prospects. Today,
RIL has three joint ventures — with Chevron, Pioneer and
Carrizo —and has made a cumulative investment of $7.7 billion
(as on 31 September 2014). The JVs have witnessed strong growth
in production, driven by good additions and strong productivity
over the years. RIL’s revenues and profits from shale gas
have overtaken its domestic E&P business. In the first half
of the current financial year, RIL’s revenues from shale
gas stood at Rs 3,236 crore, reflecting a year-on-year growth
of 43.6 per cent, and EBIT was at Rs 1,047 crore, up 44.8 per
cent. The EBIT margin was at 32.4per cent.
So, from the financial point of view, RIL’s refineries and
the petrochemical complex continue to be its financial backbone.
The twin refineries with an aggregate capacity of 1.24 million
barrels of oil per day (mbpd) generated a revenue of Rs 4,02,149
crore, which is 78 per cent of the total revenue, in the last
financial year. The EBIT from the business was Rs 13,392 crore,
about 55 per cent of the total. While refineries contributed over
70 per cent to RIL’s revenues in each of the past five financial
years, the petrochemicals business stood second with over 20 per
cent. But the contribution to the EBIT was much higher for the
petrochemicals business — at 36 per cent last year. The business
generated Rs 69,539 crore in revenues and an EBIT of Rs 8,403
crore in 2013-14.
In the first half of the current financial year, when the company
recorded Rs 2,21,301 crore in revenues and Rs 22,895 crore in
profit before depreciation, interest and tax, the revenues and
EBIT from the refineries were at Rs 2,01,671 crore and Rs 7,658
crore, respectively. The average gross refining margin for the
second quarter rose to $8.3 per barrel from $7.7 a year earlier.
The revenues and EBIT from petrochemicals in the first half were
at Rs 52,049 crore and Rs 4,224 crore, respectively. The petrochemicals
division has registered an 8.1 per cent EBIT margin.
Debt For A Reason
RIL was debt-free on a net cash basis until a year ago as cash
reserves were higher than the consolidated debt. But the extensive
borrowings for telecom and petrochemical capacity expansion have
tested its balance sheet. On 30 September 2014, RIL had a consolidated
debt of Rs 1,42,084 crore. Discounting the cash hoard of Rs 83,456
crore on its books, the net debt stood at Rs 58,628 crore.
The analysts, however, support the massive capital investments
by the company. Mukesh’s foray into broadband and the telecom
sector at large will ensure effective deployment of its consistent
cash flow from the traditional businesses, they opine. Deven Choksey,
managing director of K.R. Choksey Securities, says RIL’s
cash flow of around Rs 40,000 crore has forced it to invest in
capital-intensive sectors. “Which means, the cash flow of
three financial years and the existing cash reserve are enough
for the company to fulfil the next three years’ investment
commitment of Rs 1.8 lakh crore,” says Choksey.
In the past four years (3 January 2011 to 19 December 2014), RIL’s
scrip has dipped 14.69 per cent, while the BSE Sensex gained 33.12
per cent in the same period. In 2014 (till 19 December), its share
price staged a modest recovery, gaining 1.28 per cent, to touch
Rs 900, even as the BSE Sensex rose 29.48 per cent.
According to Mukesh, the company is at an inflection point in
its journey to create value for its stakeholders. “In the
next two years, we will go up in debt to about Rs 60,000 crore.
Our goal is to become debt-free by 2017-18 on a much larger base,”
he said. It appears he is risking the short term for the long
term.
(Published in Businessworld issue dated 12 January 2015)
