India as a market Part 2: The top 3 Indian companies
Hello folks,
according to voting, today we have the topic of India's topperformers before us. Before we start, however, as always, my disclaimer.
Disclaimer: This is not an investment advice. It is also not an invitation to buy / sell financial products. I only describe my own opinion here. You have your own responsibility towards your investments. So I also assume no liability.
So that we all start from the same point, I suggest the following part 1:
RELIANCE INDUSTRIES LTD ($RELIANCE) as the largest private company in India
Part 1: Introducing RELIANCE in facts, figures and data.
RELIANCE in figures, data and facts
Making Reliance Industries Limited tangible as a company is relatively complex in this case - in my opinion, RELIANCE can best be compared to a flying retailer with 6 core product themes. In addition to consumer goods and digital services, RELIANCE also provides commercial support around financial topics and is also active in the telecommunications sector. The group thus relies on several pillars individually strong and tries to diversify, which is also tangible in the everyday life of almost every Indian: The Reliance market (see (1), (2)).
In my opinion, the Reliance market follows the same strategy as the RELIANCE group itself. This supermarket is supposed to provide high accessibility via a densely populated network of supermarkets, but at the same time be low-priced and diversified in terms of assortment. No easy task, because Reliance Retail operates 15,196 supermarkets in India and is present in 7,000 cities. If the total sales area of all RELIANCE stores were combined, this would amount to 3.86 million square meters (see (1), (2), (3)). But here's the trick: In India, it's not even that common to go shopping in these stores. Instead, so-called kirana stores are used to stock up on what is needed. Consequently, this leads to a migration of capital towards smaller retailers away from the RELIANCE stores.
So let the small retailers have their money.
You have to quickly get away from the idea of huge corporations that dominate the market and can have virtually everything for themselves. India is a completely different world in terms of urban development, logistics, and culture (as noted in my first article on India), and may not meet the expectations of what one would think of what will be the youngest emerging market in the world.
Yes - India has a school system. Yes - India has significant industries.
The food sector is not one of them.
Specifically, 92% go - Yes, read correctly: TWENTY-NINE PERCENT - to the kirana stores, while the giant chains are allowed to fight over the 8%. What sounds like the dream of an anti-capitalist, unfortunately has a somewhat sad reason: There is no other way (see (4), (5)).
What is a kirana store anyway?
I would most likely choose the comparison to a corner store, that is:
- Little sales area
- Limited assortment
- Focus on regional products
- Haggling and minute-long negotiations are part of the good tone
- Taxes have been rather a decorative accessory for a long time and most of them have not been paid.
- Theoretically, it is possible to write off the purchase. So to pay the purchase later.
- Without credit card
So we understand that in Germany such stores have been almost completely suppressed in the 50s until today. But why not in the emerging market of India?
India is usually not characterized by a functioning or attractive public transport. Often there are no connections between several places, so that one cannot travel without a car. Considering that only about 1% of Indians own a car, this task is not exactly made easier. In addition, power outages often make it pointless to store goods that need to be refrigerated.
As a result, most citizens cannot even get from their village to the larger metropolises or transport larger purchases. In this respect, RELIANCE's award as the largest retail company (in terms of store network) in 2013 is of no use (see (5), (6)).
Yes - hardly any infrastructure. Yes - hardly any affordable mobility. Yes - power outages.
Gallant comments on the (night)dream of e-mobility in emerging markets. Since that is not going to be the topic of this post, I refer you to my posts on BMW and e-mobility.
But as part of the 4 sectors, what does the Retail sector of RELIANCE have in common with them?
Correct - they are not RELIANCE's main business and if you add up their share of sales, you get 41.3% share of sales. Correct: 58.7% is accounted for in total by the remaining 2 sectors (cf. (1)). Which are these?
The main category is the processing of petroleum products. In particular, liquefied petroleum gas, propylene, gasoline, kerosene, etc. are involved, with petrochemicals also playing an important role. These products also have in common that their sale is legitimized by the example of gasoline (car transport, etc.) as well as kerosene (aircraft fuel). However, it is precisely these products that will lose volume in the foreseeable future. Therefore, from my point of view, a profound analysis of the present share is appropriate (cf. (1), (2)).
Can the company, which has been listed in the FORTUNE 500 since 2004, convince here?
A glance at the website already reveals a colorful package of awards, such as membership of the FORTUNE 500.
However, if we look at the sales (and especially their development), significant problems arise. On the one hand, RELIANCE is expanding strongly due to sales growth.
That's fine.
However, in my opinion, the core areas are strongly aligned with the oil and gas sector, as evidenced in particular by the direct naming of the "Oil to Chemicals" and "Oil and Gas" activity. All other categories are very broadly titled and listen to stylistically clear labels such as "Retail", "Other" and the digital and financial services addressed. This demonstrates almost perfectly the focus of this group.
It's not so pretty.
Can we already draw an interim conclusion before the actual quantitative share valuation?
It is possible - and quite clearly so. The existing sales structure looks simplified as follows (cf. (1)):
- Growth from 2021 to 2022
- Oil and chemicals: +58.85
- Retail: +27.63%
- Others: +56.41%
- Digital services: -12.05%
- Oil and gas: 210.58%
- Financial services: -30.55%
Theoretically, I could leave these revenue numbers here without comment. What we clearly see here is that RELIANCE's expansion trajectory is being driven most by the oil segment. The retail segment recorded a rather moderate growth of 27.63%.
Why is this problematic?
I see the dependence on fossil fuels or oil as tending to be archaic. It's not going to be one of the high performers in the foreseeable future in my opinion. The prospect of hydrogen buses and trucks, bio-diesel from either algae or used chip fat (and yes, these less complex e-motors) alone put the future of these business areas to the test. It is therefore interesting for me in the short to medium term.
But I have spent a lot of time on the retail sector for a reason. It must be clear that this pillar of RELIANCE is based on structural disadvantages for me and that the current Indian culture will make it difficult for this diversification to spread before this business can reduce its heavy dependence on oil and gas.
The bottom line is that RELIANCE is an interesting company. Praise from the management, as contained in (7), is nevertheless out of place for me. The long-term perspective is currently not secure enough for me. Therefore, I consider a stock analysis to be useful, but I would not put this company in my portfolio in the long term (see (7)).
I hope you enjoyed my first article on RELIANCE! Do you want to see the stock analysis? Or would you rather go directly to the next company?
Feel free to write me in the comments!
If you are interested instead of oil after cigarettes, feel free to check out my BAT update!
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#india
#etfs
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Sources
(1) https://de.marketscreener.com/kurs/aktie/RELIANCE-INDUSTRIES-LTD-9058833/unternehmen/
(3) https://relianceretail.com/reliance-market.html
(4) https://www.ril.com/TheRelianceStory.aspx
(5) https://www.vallee-partner.de/blog/unorganisierter-handel
