Reliances Jio: Will it live up to the shareholders expectations?

Jio is one of the largest transformational green-field initiatives anywhere in the world with
an investment of over 150,000 crore.
- Mukesh Dhirubhai Ambani, 1st Sep. 2016
Since 1981 when Mukesh Ambani was pulled out of the Stanford MBA program by his father
Dhirubhai Ambani to help him take Reliance Industries (RIL)s business into unchartered
terrain, Mukesh Ambani has diversified Reliance Industries into a corporate mammoth
worth 4.38 trillion as of first week of October 2016. The conglomerate operates into
petrochemicals, fertilizers, textiles, SEZ development, and now telecom or broadband
business and media.
The Background
A newly created venture, Reliance Jio the telecom and broadband business of RIL aims to
enable this transformation by creating not just a cutting-edge voice and broadband
network, but also a powerful ecosystem on which a range of rich digital services will be
enabled a unique green-field opportunity.
The three-pronged focus on broadband networks, affordable smartphones and the
availability of rich content and applications has enabled Jio to create an integrated business
strategy from the very beginning, and today, Jio is capable of offering a unique combination
of telecom, high speed data, digital commerce, media and payment services 1. It also
promises to shape the future of India by providing end-to-end digital solutions for
businesses, institutions and households and seamlessly bridging the rural-urban divide. With
such tall and ambitious promises, the company launched its telecom product on 1 st
September 2016 during the Annual General Meeting of RIL.
Despite being such an audacious project with a huge investment of 150,000 crore, the
launch created a negative impact, at least for short-term, on the price of shares of RIL (see
fig. 1), and it prices on the day of launch fell from 1,058 (31-Aug.-2016) to 1,029.15 (1Sep.-2016) and went on falling further in the early coming week before it started moving up;
however, the 52 week range of RILs share price was 882.10 1,128.902.

Fig. 1: Share price of RIL during Aug.-Sep. 2016 (Source: Yahoo Finance)

Source: http://www.ril.com/OurBusinesses/Jio.aspx (accessed on 1-Oct.-2016)

Historical data for Reliance Industriess shares can be accessed from http://www.bseindia.com/stock-shareprice/reliance-industries-ltd/reliance/500325/#. Alternatively, it can also be accessed from
https://in.finance.yahoo.com/q/hp?s=RELIANCE.BO.
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The Financials
The RIL has been playing on solid fundamentals and the market was seemingly less volatile
as indicated by the India VIX (the volatility index) being on a downward trend around that
period. The leading indicator of the broader economy, the SENSEX of Bombay Stock
Exchange (BSE) was also moving positively at above 28,500 level. The key indicators of RIL
indicate relatively better financial stability. For example, the Price-to-Equity ratio was 12.99
and market cap was believed to be 360,357.51 crore.
Reliance Jios consolidated financial statements for the year ending 2015 (2014) showed a
total equity of 30,080.23 lakh (23,051.54 lakh), aggregate liabilities of 51,966.43 lakh
(18,909.03 lakh), and total assets worth 82,046.66 lakh (41,960.57 lakh)3, respectively.
The company has a closing balance of loss for the year worth 50.83 crore (27.39 crore) for
the year 2014-15 (year 2013-14)4.
The Macros
The telecommunication sector of India which was under huge debt of more than 250,000
crores, has got relief as Telecom Commission has approved to raise the Foreign Direct
Investment (FDI) cap from 74 percent to 100 percent. The Ministry of Commerce & Industry
has taken this important decision in order to encourage foreign investors to invest in the
India telecom sector. The telecom sector of India has received FDI of US$ 12,500 million in
last 13 years which contributes 7% of overall FDI inflow. However, the FDI in segments like
radio paging, telephone and cellular mobile services has declined by more than 80%
because of strict regulatory environment and economic slowdown in the country.
The significant amount of foreign investment in Indian telecom sector was at bay before the
government released the new FDI norm. The permission of 100 percent FDI in Indian
telecom sector will help to attract a foreign investment of more than $10 billion in the
coming years. An increase in FDI cap will also help some major players to enter into Indian
telecom industry and this will make overall competition in the sector extremely furious5.
The Challenge
Given the background and information related to financial statements of both Reliance
Industries Ltd. (RIL) and Reliance Jio Infocomm Ltd., suggest if investing 150,000 crore into
an ambitious project such as Jio is worth taking the risk for the investors? Additionally, data
on the rate of return that the market (BSE Sensex) has generated over last few years, along
with risk-free rate of return have been appended here. Youre expected to advise the
existing (and potential) investors whether this investment decision is financially viable or
not? And if viable, suggest what percentage of return can be expected from this
investment?

Reliance JIO Infocomm Ltd.s consolidated financial statement 2014-15,. Available at

http://www.ril.com/getattachment/2a6bd591-2b22-4b06-a7f3-b9c3c00d9d71/Consolidated-FinancialStatement-2014-15.aspx (accessed on 1-Oct-2016).
4
Reliance Jio Infocomm Ltd.s Eight Annual Report 2014-15. Available at
http://www.ril.com/getattachment/31c66aa0-6280-4324-94e8-e955ed4a0d32/Standalone-FinancialStatement-2014-15.aspx (accessed on 1-Oct.-2016).
5
http://www.oifc.in/telecommunication (accessed on 1-Oct.-2016).
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