The industrial behemoth has been the darling of the market in the ‘80s and ‘90s, but has disappointed its investors in the last decade. The share price has hardly doubled from its 2007 levels, offering a CAGR of paltry 7% to the investors. On 31st March 2007, the share price was Rs 730, and on 23rd june, 2017, the share price is 1432 with a minuscule dividend yield. During the same period, Sensex has given a return of 9.1%. So, Reliance has even under-performed the index by a good 200 basis points. The fact that the dividend yield has been meager as well, sums up that reliance industry has only caused disappointment to the investors in the last decade.
Let us analyze why this has been the case -
Business has underperformed
Downgrading of the premium valuation allotted to Reliance Industries
Dilution of the “Reliance” brand - After the split between the brothers, The ‘Anil Dhirubhai Ambani Group’ has suffered a lot of setbacks in power, telecom, media etc. Since the visibility of this group was more due to its presence in higher number of consumer facing business, the inferior quality of the products & services the group offered, has caused diminished the brand value of ‘Reliance’ in the consumer mind-space, which has had also affected ‘Reliance Industries’. Since both groups share the same brand name. All this has greatly reduced the brand premium that the company can command.
Overvaluation - For a company growing its bottom line at 9%, a ten year average P/E ratio of 15 translates to a PEG ratio of 2, which certainly point towards over valuation. So basically, the share was virtually in a ‘cooling off’ period, during which, its valuation mellowed down to a more reasonable level.
The JIO story
People hopeful of a turnaround due to JIO are being highly optimistic in my opinion, RCOM initiated a similar price war in its initial days which resulted in low ARPU customers (average revenue per customer) getting concentrated with RCOM while all the premium customers went to Airtel. Few premium customers are desirable to a lot of Low ARPU customers because providing customer support and services to large pool of customers who do not give you much revenues is not cost efficient. JIo will be a success story only when customers start using it as their only SIM. Mostly, people use it as a second SIM just to avail free calling and cheap data. Most customers are reluctant to let go of their first service provider (airtel, idea etc) in favor of JIO because the call quality and data speeds are not at reliable, which will continue to be the case till Reliance simply aims for volumes.
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