Reliance Industries had a story to tell: its foray into telecom, and its declining returns. Now with the passage of time, the story seems to have changed, at least for the analysts.
Reliance is yet to come near its historical high market valuation.
It had a high market capitalization of Rs.4,794 b in 2008 and Rs.3,705 b in 2015 (so far). At the current market value of Rs.2,835 b, it is about 41% lower than its all time high. There was a lot of optimism built into the high market prices in 2008 and 2009.
Subsequently, it has had its share of issues to deal with, some external and some internal, due to which its return on equity and return on capital have been declining.
Its investment in telecom has been significant, and it has a delayed return cycle. This itself is the biggest drag on its return on capital. Reliance has spent over Rs.2,000 b in capex since 2011 twice its previous 5-year capex spend. As of 31 March 2015 there were more than Rs.400 b of commitments outstanding.
However, if we believe in the changed storyline there is potential for efficiency in capital allocation for the company as a whole. Its capital expenditure cycle is going to be completed soon.
For a careful investor there were opportunities in 2012 and 2013 to buy the stock at much lower prices. I am not sure how many did though.
Yet, the next few years are going to be interesting for this business.
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