RIL needs to boost its income stream

Reliance Industries Ltd ( RIL), India’s largest company , will become debt-free in a year, a positive fallout from selling stake in its oil and gas blocks to BP for about $9 billion. Another gain would be the expertise of BP, one of the pioneers in offshore drilling and exploration , to boost output from its large offshore field KG D6. Output there is low and stagnating, prompting investors to dump the stock, which has under-performed indices this year.

Yet, RIL’s refining margins are the best in the world, its petrochemicals businesses are recovering from the global shock of 2008-09 and after the 3G auctions, it now owns the largest amount of wireless bandwidth among all companies in India. Each of these are areas of great promise, which if leveraged well, can boost the bottomline . Today, wireless voice communication is a crowded, hyper-competitive market with very slim margins .

RIL must use the bandwidth at its disposal to crack the nascent market for data and value-added services. These will become the growth — and profitability — drivers of the near future and RIL has a great opportunity to get there ahead of its rivals. RIL is also planning to take advantage of the recent growth in the synthetics market to invest aggressively in its petrochemicals business. Retail is one area where the company entered with much fanfare sometime ago, but hasn’t done too well. By and large this mirrors the experience of most retail players who have found it tough to crack the dominance of mom and pop stores and local markets.

RIL has chosen to grit its teeth and push on with the retail business, and grow the cash and carry segment, but it will have to assess its retail model very carefully. It needs to soothe nervous shareholders. One way to do that would be to bundle income generating assets, now under the personal ownership of the promoters, into RIL. These include the pan-India east-west pipeline, the large terminal cum port facilities at Jamnagar and the Reliance SEZ. Once these are merged back into the company, they’ll provide additional income streams that will boost earnings per share and therefore, higher valuations.