ril: lure of technology

Reliance Industries has intentions to change the game in the telecom sector. Investments lined up to the tune of $10 billion; sounds good, does it?

All this is being done apparently for two reasons: one is emotional and the other is growth. We have no response to the emotional aspect other than that this investment is coming from total shareholders' money (i.e. from the company itself), not from a selected few. As for the growth, the question is whether it will add value to the firm. Some growth does; and some doesn't. There are plenty of examples of bad growth.

Take for example: Bharti Airtel has been the undisputed leader of telecom market in India beating every other player; but only until recently. Now the story is quite different, if this has to be accepted. The return on capital has dropped significantly, by about 35%; no different for return on equity. This is probably thanks to its appetite for growth outside India. In the process it borrowed too much. The African safari has not yielded adequately. The market-cap has stayed at about Rs.120,000 crores for the last three years. We can argue that if the company continues to earn this kind of return on capital in the coming years, its value will fall significantly. The reason is simple: its cost of capital is way higher than the return made. Where is the logic in making more in a losing proposition? In fact, if the company has large capex plans and there is no improvement in return on capital, its value will fall sooner than anticipated. Can it improve its position? It is possible because investments in new markets, especially in this kind of business, take time to fructify. But not sure.

Coming back to Reliance, the question is will it earn adequate returns on the invested capital? Telecom is asset-heavy, technology-driven business; consequently, it is a high-risk business.

But then Mukesh Ambani is a master performer. He might prove everyone wrong. Time will tell, I guess.