Reliance Industries Ltd.’s unexpected 1-for-1 bonus issue, which Chairman Mukesh Ambani unveiled at the company’s 40th annual general meeting on Friday, gave a further boost to shares that are already the second-best performing this year on India’s benchmark index. What’s interesting about the announcement, however, is the timing. The last time India’s most-valuable company gave one free share for each held was in October 2009, when it was embroiled in a bitter legal battle over the sale of natural gas to Mukesh’s then-estranged younger brother Anil Ambani’s power plant. Back then, Reliance wanted to shore up investor confidence ahead of final hearings before the Indian Supreme Court. So what’s the trigger now?
The answer in one word: data. The refining and petrochemicals group is changing its stripes with an audacious and expensive bet on data, which Mukesh Ambani says is “the new oil.” Most of his speech at the shareholders’ meeting was about Jio, the $30 billion fourth-generation mobile network. Launched as a free service in September last year, Jio already has more than 100 million paying customers. But now comes the big gamble: free handsets to lure across the 500 million Indians who use cheap feature phones. To that, add a heavily discounted 153-rupee-a-month ($2.40) data plan, and an Apple-TV type of device to watch video on television sets, and it becomes clear Ambani is trying to reposition Reliance at the intersection of telecom and media.
Reliance Industries shares, YTD +46.4%
In many ways, Ambani is borrowing from his own playbook. In July 2003, a year after the death of his father and Reliance founder Dhirubhai Ambani, he started giving away expensive LG and Samsung phones at 501 rupees — less than $11 at the time — to wean customers off rival GSM networks and lure them to his platform, which used Qualcomm Inc.’s code division multiple access, or CDMA, technology. That, however, was before the division of assets that saw the telecom business go to Anil Ambani. Although the brothers have now kissed and made up and Mukesh Ambani is back into telecom, he’s using the same strategy, with a twist.
JioPhones, to be locally manufactured by third-party suppliers, will be effectively free, but to avoid misuse (of which there was a lot in 2003), Jio will collect a refundable 1,500 rupee deposit for three years. Assuming half of the country’s 500 million feature-phone users switch, Jio collects $6 billion interest-free for three years. JioPhone is very clearly aimed at the “bottom of the pyramid,” where literacy is often a issue. Reliance claims it can handle voice commands in 22 Indian languages. A more important question, though, is just what kind of average revenue per user Ambani can command with such cut-throat pricing on both the data and the hardware?
Jio’s goal of boosting revenue share to more than 50 percent by 2021 may be achievable, but a 50 percent-plus Ebitda margin is a big ask. That’s where content comes in. Just this week, Reliance agreed to buy 25 percent of Balaji Telefilms Ltd., a TV and film production company. Reliance already owns Network 18, which has a joint venture with Viacom Inc., and runs CNBC and CNN-affiliated channels in India. Shares of Jio’s rivals — in both telecom and TV distribution — fell in Mumbai as Ambani unveiled his plan. However carriage is only the entry point. As Gadfly has argued, the real prize lies in mobile content — digital music, education, Bollywood, talk shows and even politicians’ speeches. (Prime Minister Narendra Modi’s app may come pre-loaded on JioPhones. All this, of course, is for the long haul. To make sure shareholders remain on board with this telecom, media and content triple play, there’s the 1:1 bonus.