June 6 (Bloomberg) -- Mukesh Ambani, the world’s richest energy billionaire, is seeking to increase the share of his group’s revenue from new ventures in telecommunications and retail to as much as 40 percent, said a company official with knowledge of the plan.
Mumbai-based Reliance Industries Ltd., which made about 97 percent of its 3.97 trillion rupee ($70 billion) revenue from refining, petrochemicals and natural gas exploration in the year ended March 31, is looking for new ways to tap rising incomes in India, the person said, asking not to be identified because the plan isn’t public. The person didn’t disclose by when the company intends to achieve its goal.
Ambani, faced with declining gas output, has started selling Kenneth Cole apparel, Steve Madden footwear and Hamleys toys and plans to offer fourth-generation, or 4G, data services to tap business from middle-class consumers that PricewaterhouseCoopers forecasts will number more than 570 million by 2021. Reliance plans to spend $26 billion over the next three years to expand all its businesses, Ambani told shareholders in Mumbai today.
“Reliance is seeking to benefit from growing consumerism in India,” said R.K. Gupta, who helps oversee about $864 million as a New Delhi-based managing director at Taurus Asset Management Ltd. “It’s important for Reliance to diversify into unrelated businesses so it can hedge its risks and avoid possible crises in the future.”
Reliance Industries’ spokesman Tushar Pania didn’t reply to an e-mail and didn’t answer a call seeking comment on the company’s revenue target from telecommunications and retail.
Ambani, 56, plans to start a 4G broadband service before the financial year ends on March 31, the person said. Ambani, worth $21.6 billion according to the Bloomberg Billionaires Index, has prior experience in the phone business. In 2002, the year Reliance Industries also discovered a natural gas deposit off India’s east coast, he unveiled a mobile-phone service, which became India’s third-largest by number of users in 2005.
That year, Mukesh split the Reliance group with his younger brother Anil Ambani, 54, following a public feud over ownership after their father died intestate three years earlier. As part of the division of businesses, Mukesh ceded control of the telecommunications business to Anil along with power and financial services. Mukesh kept oil and petrochemicals.
In May 2010, the first sign of a rapprochement between the Ambani brothers emerged when they agreed to scrap agreements that prevented them from competing in similar businesses.
Unshackled from pacts that prevented him from returning to telecommunications, Mukesh entered the business again. A month after the pact with his brother, Reliance Industries paid 48 billion rupees for control of Infotel Broadband Services Ltd., hours after the company won nationwide 4G airwaves in a government auction for 128.5 billion rupees. In comparison, Vodafone Group Plc paid 116.2 billion rupees that year for 3G spectrum in nine service areas that covered 60 percent of its subscribers.
“In continuing to hold a bullish view about the potential of the Indian digital market, many may well count me among the optimistic minority in the industry,” Ambani said today. “Let me assure skeptics that my continued optimism is based on the significant strides that we at Reliance have taken in the past year.”
The company has tested its broadband network and finalized agreements with vendors and suppliers in the past year, Ambani said. Unit Reliance Jio Infocomm Ltd. will have 10,000 employees by next year from 3,000 at present, he said.
Mukesh and Anil signed their first business agreement since the split when Mukesh agreed to use his younger brother’s fiber optic network for his 4G wireless service two months ago. Reliance Jio agreed to pay Anil’s Reliance Communications Ltd. 12 billion rupees to use the latter’s intra-city infrastructure. The companies plan more agreements to share networks between cities in India and phone towers.
Still, Mukesh will have to convince consumers to use his high-speed service in a country where only 3 percent of mobile-phone industry revenue comes from 3G data, according to a Credit Suisse Group AG report.
“3G penetration in India is still in single digits and I’m not expecting any significant numbers of subscribers to jump on for at least two more years,” said Nitin Soni, a Singapore-based associate director at Fitch Ratings. “3G has to become profitable before people will spring for 4G services, which is still in its infancy.”
Reliance Industries shares declined 1.3 percent to 792 rupees at the close in Mumbai. They have lost 5.7 percent this year, compared with a 0.5 percent advance for the benchmark S&P BSE Sensex.
The company’s operating margin, or operating income as a percentage of total revenue, reached 5.58 percent in the year ended March 31, the lowest in at least 10 years. Reliance Industries earned 71 percent of its revenue from selling oil products and 23 percent from petrochemicals in the year ended March 31, according to data compiled by Bloomberg.
“Telecom has always been the pampered baby for Mukesh Ambani and his father before him,” said K.K. Mital, a New Delhi-based fund manager with Globe Capital Market Ltd., which owns Reliance Industries shares. “The company has previous experience in telecom and investing their large cash in businesses that will improve the return on equity, even if on unrelated businesses, is welcome.”
Return on Equity
The company’s return on common equity fell for the third straight year to 11.88 percent in the 12 months ended March 31. Reliance had cash and equivalent of 829.8 billion rupees invested in bank deposits, mutual funds and government securities, as of March 31. That surpassed 724.3 billion rupees of debt outstanding.
Ambani is betting his retail ventures may help boost returns. Reliance Retail Ltd., which operates hypermarkets, grocery stores and sells electronic goods and jewelery through branded shops, made a cash profit for the first time since its debut in 2006, according to an April 16 statement.
“This milestone is a significant step in our journey toward attaining our strategic vision,” Ambani said.
Ambani said in his annual speech to shareholders last year he is targeting a fivefold increase in retail sales to 500 billion rupees by 2016. Revenue from retail rose 42 percent to 108 billion rupees in the year ended March 31, compared with a year earlier, according to Reliance’s latest annual report.
Reliance, which operates about 1,500 retail outlets in 130 cities, is seeking to open more stores as he estimates the market will almost double to $850 billion by 2020 from $435 billion in 2010.
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