India's most valuable business is earning money hand over fist from oil. Yet what's exciting investors about Reliance Industries Ltd. are its telecoms losses.
Those should go some way toward creating the Indian equivalent of Verizon Communications Inc., the largest U.S. wireless carrier. Or at least that's what the stock's 38 percent jump this year in dollar terms is all about.
Over the past 12 months, Reliance's refinery on India's western coast has garnered $11 from each barrel of crude oil, beating the Singapore refining benchmark by an impressive $5 a barrel. With neither domestic gas production nor overseas shale output doing much, Chairman Mukesh Ambani, India's richest man, is betting on his almost-completed investments in refining and petrochemicals to shore up earnings and cash flow.
The strategy is working, but it's a mere footnote compared with Ambani's more daring gamble on Reliance Jio, the recently launched telecoms unit that's already supplying more than 1 billion gigabytes of data a month, almost as much as all U.S. networks put together.
While a haul of 100 million users over 170 days isn't to be scoffed at, it's thanks to a free trial that only recently turned into a paid-for (though attractively priced) introductory offer. The steady-state average revenue per user is still the big unknown.
With Jio's entry in September, rivals Bharti Airtel Ltd. and Vodafone Group Plc have cut tariffs. A 60 percent slump in fourth-generation, or 4G, data charges has meant that even with traffic surging fivefold in a year, industry revenue growth has been practically flat, according to S&P Global's Indian affiliate, Crisil.
It's hard to know when the dust will settle, though Reliance's assertion that it's "well-positioned" to achieve a share of revenue above 50 percent by 2021, when India's data market will top $46 billion a year, shows Ambani is betting big on a "winner takes all" effect.
Nothing wrong with that. As Crisil researchers say, Verizon's success has demonstrated quite clearly that market leadership is worth bleeding for. For almost a decade, the largest U.S. network has enjoyed a return on capital that's 5 to 10 percentage points higher than its competitors'.
Even by Verizon's standards, Ambani's goal of a 50 percent-plus Ebitda margin for Jio is ambitious, though. The U.S. carrier, which has a customer churn rate of just 1.4 percent -- compared with 4 percent to 6 percent in the hyper-competitive Indian market -- took in 45 percent of its revenue as earnings before interest, tax, depreciation and amortization last quarter.
In its first six months of operations, Jio's loss tripled from a year earlier to $3.5 million. That's a rounding error for a conglomerate that earned more than $1.2 billion during the March quarter.
The pressure to perform comes from the staggering $30 billion Ambani has spent on the 4G network. Roughly a quarter of Reliance Industries' share price now reflects the enterprise value of the telecoms business, according to Bank of America Merrill Lynch. As Gadfly has previously noted, investors would be impressed by Jio's ability to get to 200 million stable customers, each spending at least $4 a month.
That won't be enough to turn Jio into India's Verizon. At least it will be a start.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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