Why Facebook Loves India

Mugunthan Siva

India Avenue

A few weeks ago, Facebook paid US$5.7bn for a 9.9% stake in Reliance Industries, Jio Platforms (JPL) business. That was the largest amount paid for a minority shareholding in the tech space on a global basis. Additionally, on the back of this deal, Silver Lake Partners (a large US PE firm with US$42bn of Assets Under Management) specialising in the tech space stepped up and added another US$750m for 1.1% and this week Vista Equity Partners, another US Tech PE firm invested US$1.5bn for a 2.2% stake – validating and putting a 20% premium on Facebook’s valuation of JPL. There will be more who follow.

The majority owner of JPL is Reliance Industries, India’s largest company by market capitalisation (market cap US$123bn). It was founded in 1973 by Dhirubhai Ambani as a polyester yarn business. In the 1990’s the firm entered Petrochemicals, adding Retailing in 2006 and telecommunications in 2010. The company is now one of the top 100 companies in the world by market cap! On the ASX 300, it would be the largest company, exceeding CSL by 35%.

Why would Facebook pay so much for a minority stake in JPL, a majority owned subsidiary of Reliance? Jio Platforms (JPL), essentially a tech company, houses all digital initiatives and telecommunication assets of Reliance. The business is involved in mobile, broadband and enterprise as well as all digital assets and tech investments. In 2016, the company invested US$33bn to construct a nationwide 4G broadband service network and is likely to lead India towards the roll out and enablement of 5G.

The vision is to enable the digitisation of India’s 1.3bn population and digitally enable its businesses including merchants, microbusinesses and farmers. In less than four years, Jio now has a subscriber base of 388m people. Initially they added subscribers by de-stabilising the industry by offering free data and voice calls. Value absorbed Indians were obviously quick to add a Jio connected phone. Free data no longer, yet subscriber numbers continue to grow rapidly.

Facebook, which has at times lived a trouble existence in India (related to the Government’s concerns with privacy and data), has broad acceptance amongst the Indian population (300m users), compared to mainland China where it is banned! It also owns WhatsApp, which has over 400m users in India – its largest market in the world, with users doubling in the last 3 years. The partnership allows Facebook, WhatsApp, Instagram alongside Jio to further expand last mile connectivity to the smaller towns and cities of India, accessing India’s significant rural population. This digitisation will accelerate India’s all-round development, fulfilling the needs of Indian people and the Indian economy with a focus on the country’s 60m micro, small and medium businesses, 120m farmers and 30m small merchants operating in the informal sector.

In its latest quarterly and year ending results (for year ending March 2020), Reliance JIO’s division reported profit of US$742m. EBITDA margin is close to 42% and average revenue per user (ARPU) is growing steadily at Rs.131. Total wireless data traffic registered 34% y-o-y growth. Profits are growing strongly from increased tariffs and a strongly growing subscriber base. Reliance JIO added 24m subscribers over the March quarter – equivalent to Australia’s population!

Reliance Retail (RRL is another business division of Reliance Industries) and WhatsApp also have entered into a commercial partnership agreement to further accelerate RRL’s new commerce business using WhatsApp. RRL is the largest retailer in the country (in revenue and number of stores) currently has 11,784 retail stores spread across 6,600 cities and over 29 million 2 ft of retail space and an annual revenue of US$21bn.

Reliance Retail’s New Commerce platform, JioMart, is being built in partnership with millions of small merchants and ‘kirana’ shops to empower them to better serve the needs of Indian consumers. The companies will work closely to ensure consumers are able to access the nearest kiranas that can provide products and services to their homes by transacting seamlessly with JioMart using WhatsApp. India’s second largest retailer (Future Group) lags along way behind and has subsequently tried to team up with Amazon – the space is hotting up!

Currently, Amazon and the Walmart-owned e-commerce firm Flipkart control over 60% of India’s e-commerce market, according to market intelligence firm S&P Global. Yet these firms have been hit by recent regulations that favour domestic players like Jio Mart over foreign competitors.

Amazon and WalMart have been pouring investments into India’s retail landscape. However, Reliance has the inside running given its positioning and understanding of local retail customer behaviour. RRL is planning to become the largest omni-channel retailer through its hybrid online-to-offline new commerce platform. Modern retail and e-commerce only make up a small portion of India’s overall retail market. The company wants to dominate Indian retail by enlisting small retailers that make up the overwhelming majority by digitising 30m small merchants and shopkeepers (including kirana stores) already battling the onslaught of e-commerce and modern retail. There are 15,000 digitised stores in the country which the company seeks to increase to 5m stores by 2023. The addressable market opportunity at over US$2tn easily justifies its strategy.

WhatsApp Pay is set to commence by the end of this month and is already connected with three of India’s largest private banks. This is a unified payments interface (UPI) payments system which will dominate market share in the payments market – in another growth opportunity for the collaboration.

Reliance JIO’s opportunity is significant given its last mile connectivity and linkages across mobile, data, payments and retail which will allow for significant revenue generation. Through investing for growth, Reliance Industries accumulated a significant debt balance. By selling just over 13% of JPL and a rights issue, the company is now likely to be debt free within the next 12-18 months. There is no doubt that JPL will be spun out as a separate business within a medium-term time frame to unlock further value. Significant value has been created over just 4 years, but the planning commenced 10 years ago through acquisition of a small business which had bid for and acquired spectrum.

India’s remains untapped in terms of the scale opportunities which exist for global-local partnerships such as this one between Facebook and JPL. Reliance Industries has GDR’s which are available for purchase by investors globally and is usually a significant weight in most Indian mutual funds or ETF’s.

Mugunthan Siva
Managing Director
India Avenue

Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique asset management company with offices in Sydney and Mumbai. He has over 25 years experience in Australia and is lead portfolio manager for the India Avenue Equity Fund.

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