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BT Buzz: Mukesh Ambani, Mark Zuckerberg and the $700 billion kirana puzzle

The newly-formed Jio Platform houses all of Reliance's digital businesses, such as telecom arm Jio (mobile and broadband), Jio's suite of apps, digital investments (KAI-OS, Haptik), and tech capabilities like big data, AI and IoT

twitter-logoManu Kaushik | April 22, 2020 | Updated 22:24 IST
BT Buzz: Mukesh Ambani, Mark Zuckerberg and the $700 billion kirana puzzle
While a deal between RIL and Facebook was in works for some time, it's rather unexpected that it could be sealed within weeks of the initial news reports

KEY HIGHLIGHTS:

  • With Facebook's investment, Jio Platforms is valued among the top five listed companies in India by m-cap
  • RIL's infra, understanding of local market and retail network was a big pull for Facebook
  • Facebook has struggled with cracking the payments market in India  
  • RIL's refinery and petrochemical businesses are under duress due to coronavirus outbreak
  • The deal needs just CCI clearance, and should close in the next few months, analysts say

On Wednesday, when the country's richest person Mukesh Ambani, Chairman of Reliance Industries, announced a deal with US-based social media giant Facebook, it took the corporate world by storm. The deal is historic on several counts. It has substantially upped Jio Platforms' (Jio's holding company) enterprise value to a record-high - Rs 4.62 lakh crore. In December 2019, brokerage Axis Capital had estimated Reliance Jio's enterprise value at Rs 4.64 lakh crore by 2023/24. Having reached that enterprise value four years in advance is no mean feat.

For the uninitiated, the newly-formed Jio Platforms houses all of Reliance's digital businesses, such as telecom arm Jio (mobile and broadband), Jio's suite of apps, digital investments (KAI-OS, Haptik), and tech capabilities like big data, AI and IoT.

Then, cracking such a large deal in the middle of a global pandemic has brought in a fair bit of surprise element. More so in the case of RIL which is battling with its core oil and gas business. With crude oil prices trading at near-zero levels, the refining and petrochemical demand has fallen significantly. RIL's blockbuster deal with Saudi Aramco - signed last year - is also facing cancellation after the government reportedly asked a court to restrain the $15-billion deal. "While the Saudi Aramco due diligence is ongoing, clearly with COVID-19 disruptions, the transaction would likely get pushed out. The key investor concern is whether the collapse in crude would lead to deal cancellation," says an April 22 report by J.P. Morgan.

While a deal between RIL and Facebook was in works for some time, it's rather unexpected that it could be sealed within weeks of the initial news reports. Broadly, the deal is divided into two parts. Firstly, Facebook will invest Rs 43,574 crore for a 10 per cent stake, out of which Rs 15,000 crore is retained in the company and rest (about Rs 28,000 crore) will be used to redeem OCPS (optionally convertible preference shares) of RIL. A separate partnership has also been signed with Facebook-owned WhatsApp, Reliance Retail and Jio Platforms (a subsidiary of RIL) to grow RIL's new commerce business (called JioMart) using WhatsApp.

For RIL, there are several upsides from the deal. It will result in RIL bringing down its consolidated debt, but more importantly, it will bring in a new partner (Facebook) on board that can effectively monetise the vast amounts of data that Jio collects from its 388-million subscribers. "The 9.99 per cent financial investment would allow RIL ...the potential to benefit from FB's expertise in platform businesses and look to monetise the vast streams of data," says the J.P. Morgan report quoted above.

Then, it would enable RIL to compete with the likes of Amazon and Flipkart with its new commerce platform (JioMart). At the 41st AGM of RIL in July 2018, Ambani first talked about the new commerce business where he said that this vertical would redefine the retailing in India and become one of the biggest new growth engines for Reliance in the years to come. Last year, Ambani said that new commerce is a $700 billion opportunity.

"In the very near future, JioMart - Jio's digital new commerce platform, and WhatsApp - will empower nearly 3 crore small Indian kirana shops to digitally transact with every customer in their neighbourhood. This means all of you can order and get faster delivery of day-to-day items, from nearby local shops. At the same time small Kiranas can grow their businesses and create new employment opportunities using digital technologies," Ambani said in a video-recorded message on Wednesday.

But what exactly is JioMart or new commerce? JioMart has tied up with millions of local kirana stores across the country where it has brought them on its platform. Now with integrating their offline stores with WhatsApp, these local retailers can have a wider reach, and ease to display their products on Jio's platform. "New commerce is going to be our e-commerce offering. We will enable local kirana stores to become full-fledged e-commerce company. The customers would go to their WhatsApps, and access JioMart where they can find these kirana stores. The idea is to digitise the whole supply chain that's informal right now," says a RIL source. As per some estimates, India's 90 per cent retail industry is unorganised.

"RIL now could leverage WhatsApp's userbase and increase its platform's reach to digitise the kirana stores and their supply chain to potentially go far beyond other players like Paytm," says, Avinash Godkhindi, MD at fintech firm Zaggle. Recently, Paytm has launched all-in-one PoS machines that aim to onboard 10 million merchants with its customer management, billing, and payment-related solutions.

What's more? Jio could also use the heft of its retail arm - Reliance Retail - to lower the cost of procurements for these kirana stores so that they can compete with players in offline and online worlds. "Historically, RIL is known for its backward integration capabilities. They are masters in it. Remember how they moved backwards from a textile company to an oil refiner. They could leverage the retail experience to benefit mom-and-pop stores," says an analyst.

"This will help RIL create a strong rival to online e-commerce giants like Amazon and further strengthen its leadership position in retail in India," says an April 22 report by Axis Capital.

In a way, the tie-up between the two seems like a marriage of convenience. How? Each partner is bringing something to the table which the other lacks. Take Jio, for instance. Even though it has its own chat and payments apps - JioChat and JioMoney - both haven't been able to compete with the larger players in their respective segments. Facebook's WhatsApp, on the other hand, is a clear segment leader in messaging space with over 400 million users in the country.

Similarly, Facebook has been trying hard to establish a wider presence in India for a long time. From market size, India and China are crucial markets for social media companies. Since Chinese market is closed for US players, gaining a deeper foothold in India becomes much more important. Back in 2016, Facebook suffered its biggest setback in the country when it received huge backlash from net-neutrality activists for its Free Basics programme. RIL's understanding of the local market, particularly regulatory aspects, could bring Facebook closer to the Indians.

On its own, WhatsApp has struggled to penetrate the Indian payments market over data security and storage concerns. Despite beta-launching, its payments service WhatsApp Pay over two years ago, the messaging service has been reportedly approved by NPCI (National Payments Corporation of India) for commercial launch just two months ago. During this waiting period, others like Google Pay, Amazon Pay, and PhonePe have taken a clear lead.

Jio is also holding a payments bank license (with SBI) but it hasn't been able to make a mark. In fact, the whole payments bank concept has failed to take off in India with several players - Tech Mahindra, Cholamandalam and Sun Pharma's Dilip Shanghvi - having surrendered their licenses to RBI. With this new RIL-FB venture, there are possibilities that Jio's payments bank business could get a leg-up by offering credit to small merchants and MSMEs since there's a huge demand for short-term loans.

Hong Kong-based CLSA says that there is unlikely to be any tax incidence and the approval process for closure should also be rather quick. It's believed that only the CCI (Competition Commission of India) approval is required, and the transaction should close in the next few months.

"This seems like a beginning of a much-deeper partnership between the two. I expect more such investments in the future. Kiranas are low-hanging fruits; more verticals like healthcare, education are going to be tapped later. Jio's infrastructure play, and its large subscriber base are going to be game-changer. In future, we will see 10 other players who would want to use Jio's infra to create new opportunities," says a telecom analyst.

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