Mukesh Ambani appears prescient and ahead of the curve once again.
The same week that the economics of global oil was flipped on its head, Reliance Jio snapped up a cool $5.7 billion (Rs 43,574 crore) investment from Facebook in return for a 9.99% stake in Jio Platforms, the RIL subsidiary that now houses all of the empire’s digital assets.
Ambani also has more than a few reasons to be happy. Facebook’s investment and corresponding valuation is higher than the average Rs 4.2 trillion EV ascribed to the company by top brokers such as Kotak Institutional Equities, JP Morgan India, Citi Investment Research and Goldman Sachs India.Some domestic brokers such as Moitial Oswal and IIFL Institutional Equities had valued Jio at over Rs 5 trillion, but they were in the minority.
Analysts at Jefferies India note: “Valuations suggest that Facebook expects Jio’s Ebitda to double from current levels.”
Put together over the last few years, RIL’s investment in Jio stands at about Rs 1.8 lakh crore — so what effectively cost the company about Rs 18,000 crore (a 10% stake) is now bein sold for over three times that amount (Rs 43,574 crore).
But beyond this, what do both giants get out of this deal? There are more than a few theories, all of which come with their own implications for rivals like Amazon and Flipkart and should spark healthy concerns from a regulatory perspective for India’s consumers.
Theory Number 1 – ‘Phygital’ commerce… and a super-app?
Reliance Jio has always been a tech giant in waiting. Back in September 2016, when Ambani announced its 4G plans, the idea was for it to go beyond being a simple telecom operator and become a digital platform that could turn the data of a billion Indians into something profitable.
The problem is that nearly four years later, while Jio has brought on over 300 million Indian customers with its cheap data plans, its suite of apps (JioCinema, Jio Money, JioTV, JioChat) haven’t made much headway and it’s still unclear when these will start to be monetised. It’s only after Reliance starts charging, say, for JioCinema will we know how well it can do against established services like Netflix, Hotstar and Amazon Prime Video.
This issue was clearly brought out in CLSA’s research note in October 2019
“In most valuations used by the Street, including ours, Jio is valued mainly as a telecom service provider. No value is ascribed for Jio’s suite of apps, digital investments and capabilities like AI, IoT, etc,” says Vikash Kumar Jain, research analyst at CLSA.
While Ambani no doubt has plans for unlocking the value of the Jio ecosystem’s apps, one more line of attack was unveiled with the Facebook announcement: mixing WhatsApp with JioMart.
Both Zuckerberg and Ambani, the latter more so, went out of their way to describe how the deal will give Reliance access to the over 400-million-strong database of WhatsApp as it seeks to jumpstart its commerce business under JioMart.
Under this partnership , the company said, it would offer consumers the ability to access the nearest kirana, which can deliver products and services after transactions via JioMart using WhatsApp.
“In the very near future, JioMart and WhatsApp will empower nearly three 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,” RIL Chairman and Managing Director Mukesh Ambani said Wednesday.
This ‘phygital commerce’ strategy — where your local Kirana store is on WhatsApp and you send him a message to order your groceries — appears to be the first major project that Facebook and Jio will work on.
Will it succeed? It’s unclear especially considering that many others like India’s modern retail king Kishore Biyani have made similar attempts and failed miserably. Nevertheless, its something that should give pause to rivals like Amazon.
“(Out of the investment made by Facebook) about Rs 15,000 crore would remain with Jio, and this is a huge amount which JioMart can use for building its (e-commerce) network. If they are able to execute this properly on the ground, I think they are going to create massive problems for the likes of Amazon and Flipkart due to the kind of scale that they can achieve,” said Satish Meena, a senior forecast analyst at Forrester Research.
To begin with, Meena said, JioMart is expected to aggressively chase the grocery space, where they can reach a large number of households and work in a way where customers end up buying a lot of services from Reliance itself, related to areas such as mobile connection, television, music and education. “The bigger worry for Amazon and Flipkart now is to reevaluate their business model or logistics as they are not able to fulfil the grocery demand. There is a lot of demand but companies are not ready to deliver.”
According to Salman Waris, managing partner at New Delhi-based specialist technology law firm TechLegis Advocates & Solicitors, backed by the investment which makes Jio the fifth-largest firm in India, the company can also create an ‘e-commerce monopoly’ and upturn e-commerce ecosystem.
“Facebook wants to use WhatsApp for e-commerce opportunities with small businesses. Amazon, Flipkart can’t compete with Jio-Facebook because they don’t have an edge on data. While in the short term, there may not be much market impact as due to Covid-19 nothing significant shall happen in the next 3-6 months, however in the long term the alliance will not only counter competitors like Amazon and Flipkart, but will rupture the entire e-commerce ecosystem in the country,” said Waris.
There are also broader mutterings about how Jio and Facebook could eventually create a super-app, along the likes of WeChat in China, although it’s unclear how both parties could come together to create something like that, as it would inevitably be a danger to the individual identities of both parties.
Theory Number 2 – Regulatory Woes and Facebook needs an Indian Protector
The second explanation doing the rounds is that Facebook’s investment in Jio is a safe bet on avoiding the future wrath by India’s authorities. There has never been more scrutiny of ‘Big Tech’ and the challenges posed by foreign companies in terms of law enforcement and how they handle the sensitive personal data of Indian citizens and organisations.
The theory here is that COVID-19 pandemic will only accelerate these protectionist concerns and by picking up a near 10% stake in Jio, Zuckerberg appears to be buying ‘protection’ in a manner of speaking. Or at the very least, Reliance and Facebook may find more common ground when it comes to their lobbying efforts in the future.
There may be some truth to this, especially considering the problems that WhatsApp has had in rolling out its payment service in India. Having a domestic partner who has significant clout is a useful tool for Facebook, provided it can be used right.
Theory Number 3 – Mukesh Ambani has Debt Worries
Another reason why Ambani should be excited by Facebook’s investment is that it will help RIL’s plan of becoming debt-free. This plan has had a few setbacks with the delays in the Aramco deal and the puzzling lack of regulatory approvals for Jio’s agreement with Brookfield to sell its mobile network towers.
Of the cash inflow, Jio Platforms is expected to retain Rs 15,000 crore, while the rest will be used by RIL to lower debt by redeeming the optionally convertible preference shares it holds. This investment, coupled with the Rs 7,000 crore investment by BP in the oil marketing joint venture, is expected to peg back debt by Rs 50,000 crore. RIL had a gross debt over Rs 3 trillion and net debt of Rs 1.53 trillion as of December 2019.
Analysts at Credit Suisse say the deal follows the restructuring announced by RIL in October 2019, when the company transferred Rs 1,080 billion of debt from RJio to a standalone entity, leaving liabilities of around Rs 640 billion (spectrum liabilities and capex creditors) at Jio.
“The deal will aid in achieving net debt free by March 2021. As of December 31, 2019, the net debt for the group stood at Rs 1,531 billion and with Facebook’s investment, this should put RIL on course to be net debt free by March 2021,” analysts at Credit Suisse said in a note.
Those at IDBI Capital, too, share a similar view. RIL’s total net debt, according to Sudeep Anand, an analyst tracking the sector at IDBI Capital, would also come down by 28.5 per cent to Rs 1-lakh crore, which was at Rs 1.53-lakh crore at the end of Q3FY20.
“This is a big leap towards its intention to be net-debt free by the end of financial year. We remain optimistic for its core business like refinery and petrochem where we expect revival from the second half of FY21 (H2FY21). Maintain strong ‘BUY’ on the stock,” he said.
Theory Number 4 – Facebook wants Data and a Good Investment
The last and final incentive for Zuckerberg could be that even if all the projects that are conceived as a result of the Jio-Facebook partnership end up flopping, it gives it a direct pipeline into the data of India’s small and medium businesses and Jio’s network of users.
While Reliance and FB officials say there is no data-sharing agreement on the cards, it’s tough to say how this will pan out in the coming months and years.
While all the focus has been on kirana stores, what goes without saying is the inherent data play in this partnership. WhatsApp, through its commercial agreement with JioMart, could provide deeper, richer data to Facebook. That would mean, granular insights around consumption patterns akin to “who is consuming what” to “how much is someone spending.”
This, according to people closely involved with internet advertising, would give Facebook an “exact pulse of consumer insights”, which will only funnel its already formidable advertising machine, beyond the top 1000 advertisers on digital. “Facebook has been gaining a lot of traction among SMEs because of how easy it is to advertise there,” the person cited earlier added.
But above all, it could give Jio a chance of monetising its 360-million strong subscriber base, and Facebook and the marketers and publishers on its platform, willing to pay to access Jio’s user base.
“Advertising is the holy grail. Jio is sitting on a goldmine since it hasn’t been able to monetise its users,” says Neil Shah, partner at Counterpoint Research. “Besides, Jio can also integrate Facebook’s ad platform into its products on a revenue share basis,” Shah adds.
All of this hinges on how both sides have agreed to share data. “Facebook may get access to Jio’s data, but the other way could also be true, given the changes in discoverability. They could monetise discovery. How do you do that? You feed the data of apparel you likely saw on Instagram, into Reliance Retail’s inventory, which can inform the customer about its availability, and the transaction can be initiated and completed,” says Arvind Singhal, chairman of Technopak Advisors.
All of this should spark concerns both at a regulatory level — where TRAI, the CCI and other regulators take a close look at the potential side-effects of this deal on the Indian tech ecosystem — and at a consumer level, where there could be privacy issues.
(With inputs from Business Standard and agencies)