April 17 (Bloomberg) -- Billionaire Mukesh Ambani’s push into retail and digital services may help Reliance Industries Ltd. build on its best profit growth in three years amid an economic slowdown and sliding natural gas output, investors say.
Reliance Retail Ltd., which sells Kenneth Cole apparel, Steve Madden footwear and Hamleys toys, turned a cash profit for the first time since its debut in 2006, the Mumbai-based parent said yesterday. Revenue from the unit jumped 42 percent to 108 billion rupees ($2 billion) in the year ended March 31. Ambani said last year that he is targeting a fivefold increase in retail revenue to 500 billion rupees by 2016.
The owner of the world’s biggest refining complex is seeking to cut dependence on the energy business as gas production in its biggest field in India dwindled to less than a third in three years. While Reliance reported a 32 percent jump in net income in the three months to March 31, profit has declined in four of the past six quarters. The consumer and phone businesses have the potential to contribute half of the company’s total revenue in about four years, said Deven Choksey, chief executive officer at K.R. Choksey Shares & Securities Pvt.
“These are large-scale businesses and provide visibility of revenue, profit and cash deployment over the next half a decade,” said Mumbai-based Choksey, who manages $125 million in assets for wealthy individuals. “These will help hedge its risks of investing only in the oil and gas business.”
Reliance Industries profit last quarter climbed to 55.9 billion rupees, or 17.30 rupees a share, from 42.4 billion rupees, or 12.9 rupees, a year earlier, the Mumbai-based company said yesterday in a regulatory filing. That beat the median estimate of 55.3 billion rupees in a Bloomberg survey of 30 analysts. Sales fell 1.2 percent, the first decline in 14 quarters, because of maintenance shutdowns.
The shares declined 3.9 percent to 773.70 rupees in Mumbai, the biggest drop since Oct. 8, 2012. The stock has fallen 7.8 percent this year, compared with a 3.6 percent loss in the benchmark S&P BSE Sensex. The company lost its No. 1 position as India’s biggest by market value to software maker Tata Consultancy Services Ltd. and Oil & Natural Gas Corp., the nation’s largest explorer.
Reliance, which announced a dividend of 9 rupees a share, earned $10.10 for every barrel of crude it processed in the quarter, compared with $7.60 a barrel a year earlier and $9.60 a barrel in the previous three months.
The refiner may spend $8 billion in five years on refining, telecommunications and retail as it expands its consumer offerings, according to Deutsche Bank AG estimates. Reliance is “focused on expanding its retail footprint,” an official told reporters yesterday in Mumbai, asking not to be identified as he isn’t authorized to speak on the topic.
Tushar Pania, a spokesman for Reliance Industries, declined to comment on the company’s telecommunications and retail plans.
Reliance had cash and equivalent of 829.8 billion rupees invested in bank deposits, mutual funds and government securities, as of March 31, the company said. That surpassed 724.3 billion rupees of debt outstanding.
“A company of Reliance’s size has to look at other sectors because just oil may not give them enough growth opportunities,” said U.R. Bhat, director at Dalton Capital Advisors India Pvt. in Mumbai. “They have the cash and they’ve realized that the strategic shift is required.”
Reliance Industries may struggle to maintain margins in the telecommunications and retail businesses, said Raj Kothari, a London-based fixed-income trader at Sun Global Investment Ltd. that holds the company’s bonds.
Profit at Bharti Airtel Ltd., India’s biggest phone company, has declined for two consecutive years, while debt has climbed almost sevenfold since 2010, according to data compiled by Bloomberg. Shares of Reliance Communications Ltd. have slumped 71 percent since listing in March 2006 as call rates remained near the lowest in the world.
Future Retail Ltd., which runs the nation’s biggest chain, reported its lowest profit in three years in the 12 months ended June 2012, according to data compiled by Bloomberg. Net income has dropped in four of the last six years.
“I see rough roads ahead as competition is intense with margins struggling,” Kothari said. “But since he already had these assets at his disposal, to him it makes sense to push ahead in telecom.”
Helping Ambani, 55, diversify into mobile and data services in the world’s fastest growing market, is his estranged brother Anil, 53, with whom he fought a public, bitter battle before and after they divided the Reliance empire in 2005 following the death of their father Dhirubhai.
The two signed their first business agreement since the split this month when Mukesh agreed to use Anil’s fiber optic network to offer fourth-generation, or 4G, broadband wireless services. The deal may lead to further cooperation and sharing of signal towers built by Anil’s Reliance Communications, the two companies said in an April 2 joint statement.
Reliance Jio Infocomm Ltd., Mukesh’s phone unit, will pay Reliance Communications 12 billion rupees to use the latter’s infrastructure, as it prepares to roll out its services.
The deal benefits both brothers as Jio owns airwaves for broadband use, while Reliance Communications operates in other bands, including 3G spectrum, used for voice and data, analysts led by Vinay Jaising at Morgan Stanley wrote in an April 2 report.
Apart from consumer and phone businesses, Reliance is set to spend $27 billion in five years to build petrochemical plants and drill wells, Deutsche Bank estimates, including $11 billion on energy exploration and $8 billion to boost petrochemicals production. The company borrowed an unprecedented $5.8 billion overseas in 2012.
Reliance operates more than 1,450 retail outlets where it sell goods ranging from vegetables to clothes. It also owns an 18.53 percent stake in luxury hotels operator EIH Ltd. In March 2011, Reliance started an Indian joint venture with U.S. investment company D.E. Shaw Group.
The company added 184 stores last fiscal year as it continued to expand across all formats, while same store sales growth ranged between 7 percent and 18 percent, according to yesterday’s statement.
“RIL is doing well to diversify so they can reduce their dependence on their oil business,” said Philipp Good who manages $2 billion of global bonds in Zurich at Fisch Asset Management Ltd.