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    Reliance Retail could be an incredibly large company as an omni channel play: KKR India

    Synopsis

    ‘Reliance Retail is an Indian company based out of India, grown in India and I do not see any challenges on the regulatory front at least.’

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    In Reliance Retail, we are finding two big trends -- digitisation that is going on in the economy and the shift from unorganised to organised retail, says Sanjay Nayar, Partner & CEO.

    Cheque after cheque coming in , first Jio, now Reliance Retail. What is next from the Reliance stable?
    I have no idea about the Reliance stable but I think the kind of funds being deployed by private equity funds just shows the confidence in the long-term growth story because I do not think it is an accident that so many funds have invested. It just tells you that this is a great time to be investing and obviously funds like us are looking through the trough and seeing some very secure trends in the future. Of course, it is in the future, given what we are going through in terms of the pandemic but I will say it does not take away from the basic structural changes that are going on in the economy and in consumer behaviour and digitisation. So there is a lot going on and that is what these investments speak too, frankly.

    Why Reliance Retail? How do you value Reliance Retail right now?
    I do not think it is fair to comment on the valuation but the way we looked at Reliance Retail is that it is a great play on what could be and it already is the largest retail and could become an incredibly large company as an omni channel play. We are looking at two big trends -- digitisation that is going on in the economy and the shift from unorganised to organised retail. If you look at their current spread of 12,000 odd stores, they obviously are going to go places much more than that in the next four-five years.

    If you look at the fact that there is the connectivity with Jio in terms of e-commerce and finally if you look at the strategy which Reliance is going to adopt and has already started and is experimenting to bring in the small-sized merchants, the corner shops or the kiranas -- that becomes a very powerful story as they are banking on the shift from organised to organised. All of us go to the stores on the weekend to shop for grocery, convenience. We have seen the success of electronics and fashion. Then you have obviously the e-commerce flow that comes in and finally you still have the old habits that change hard. You still order things from the kirana shop and kirana shops are extremely efficient. They come and deliver stuff to you. They will probably bill you two weeks later.

    So the strategy here is not to disintermediate the kirana but is to engulf the kirana into the same ecosystem and to empower them with technology and supply chain. We are playing to all these three trends and that is how we looked at this investment frankly.

    PE investments typically work in two ways – a) you pump in the money, you watch the baby grow and then you exit when it decides to list or before that actually. B)Sometimes it is also with the vision of a future buyout. Do you think the Reliance Retail business model is good for perhaps a buyout in future?
    We have not. It is a small minority stake. We are really backing the management team and Mr Ambani’s vision and the tremendous execution promise. In a minority stake like this, I do not think we are banking on an exit of that nature, if you ask me. If he controls a company, then that is a different issue. We can talk about it. I think this can just be a massive Indian company playing to the growth in the retail sector.

    "The strategy here is not to disintermediate the kirana but is to engulf the kirana into the same ecosystem and to empower them with technology and supply chain."

    — Sanjay Nair


    Look at markets like Indonesia, you cross $2,000 per capita GDP and retail just explodes and all kinds of formats explode. A stake of under 1.5% is not something that we would think about how to exit. Whether it is going to be bought out or not is too early to say and we are not the decision makers here to think about it that way. But think of it this way, you can have a listed entity in India of a huge size that plays to all these trends and you have seen them in China, you have seen them in Indonesia, you have seen them in Japan, so why not India?

    Are you hoping that Reliance will be able to get some strategic partners to make the retail business go to a different level or are you just happy with what you have invested in?
    Yes, we are extremely pleased. Frankly, we are backing the strategic partner which is Reliance itself. I do not know in a physical retail market like India with the Jio initiative already off the ground and a strategy to combine the kirana shops and to empower them given the amount of supply chain they have built out in terms of warehouses, cold chain, farm to folk, I do not see why this is not the strategy itself? We are actually in a way backing a strategic partner in India to cater to the Indian middle class and changing behaviours and which has put a massive amount of investment already in technology and supply chain. That is the play here.

    Unlike Jio where you have an investment, retail some would say is a much more complex business. There are lots of state and central challenges, there are different structures in terms of what you can do and how much you can invest. How do you see those regulatory hurdles coming on the way for growth for Reliance?
    This is an Indian company so I do not think there are regulations to worry about here. And secondly, Future gets them a lot of supply chain benefits but frankly at the frontend, Reliance already has 12,000 stores. I think an Indian company based out of India, grown in India and if they execute the right way all the stuff we spoke about, I do not see any challenges on the regulatory front at least.

    Help us understand your interest in speciality chemicals as well as pharmaceuticals. Are you interested in Granules? Where is the process headed?
    I would not comment on companies where we have not invested like Granules but I will say broadly pharma has been a sector that we have been focussed on for a long time. We invested in Gland Pharma many years ago. It was quite a successful exit and the entrepreneur is still there and doing a fantastic job.

    Pharma in India is one of those domestic areas that is very resilient and is getting a lot of tailwinds now with Covid as well. In the case of JB, we have three, four very strong products which are doing very well and they speak to the growth in the chronics area. I would say we are extremely excited about JB but obviously cannot comment. It is a listed entity but I would just say that the pharma sector has great secular tailwinds.

    I also think that we need to focus on APIs as that is an area which makes us a bit more atmanirbhar (self reliant). That is an area we need to develop as an alternate supply chain within the country. The government is putting out a lot of policies and support around that and so that is another area we should be focussing on.

    A lot of our peer funds are looking at these companies again. So my view is that a lot has to be done in the pharma API sector and domestic formulations. High quality institutional money that comes in gives it more ammunition for capex, distribution, better governance, good management I think these are all positives for consolidating the pharma sector, making it bigger, making it more self reliant for the country as a whole.

    Speciality chemicals is an area where we have not yet gone in but we are clearly looking for something to because it again is a combination of science and low cost manufacturing which India is pretty good at. So we are excited about both these sectors honestly. Tthe third area is technology in general.

    We have been a late starter but it is never too late, we will definitely look for technology companies and that plays to the whole investment in Jio and Reliance Retail which is playing to consumption upgrade and digital transformation. That is an area we have to stay focussed on.

    I also wanted to talk about CG Power, which you have recently exited. A huge turnaround story is playing out there and it seems that Murugappa promoters are buying it out. Do you feel that you exited a little too soon?
    Just to be clear, I mean, that is something from our credit shop. It is not from the private equity side. It was ownership of shares on the invocation of a pledge because of a default on a loan. That is determined pretty much by the credit committee and by our trustees. I do not think there is a feeling of remorse or being left out as it was just a loan that turned pretty sour and frankly at whatever recovery we got, we went. We also need to just do the cleanup which we are doing and then move on in life.

    Where do you think syndicated debt is higher? On one side, corporates are not spending or expanding and you have corporates which understand the ability to leverage the balance sheet and are actually deleveraging. A classic case here is Reliance. Where do you think that end of the market is moving ?
    I personally have a lot of interest in understanding corporate bonds of all kinds, infrastructure, municipality, corporate debt whatever. The syndicated debt market is actually shut right now after the IL&FS crisis and all the different accidents. No emerging economy can grow unless there is a really robust secondary debt market which is I think what you are referring to. Now there are two things that you need. There were lots and lots of committees around this and so I do not think you need another committee. But what is needed is the issuers and the investors

    I think issuers have lined up, it does not have to be the AAA people. In secondary debt market in every country, issuers really are the people who need the capital and you need investors who can price that risk reward so AA, A, BBB whatever. The mechanisms are well established. There are the clearing agencies, the listing options. What you really need to get this thing going is not for the banks to buy, you need secondary investors which the world over are insurance companies, pension funds, bank treasuries, high net worth families.

    You need long term capital to come in which can price risk smartly and get this market going. I think the government is now looking very seriously at converging some of the regulations along with the help of Sebi and others so that we can have clarity of rules and insurance and pension money can really come into this market.

    Otherwise, the backbone is already there, the infrastructure that is ready, the listing rules are there and there is a futures market now. There are all the trappings that you need to have a robust secondary debt market. Plus, as I keep saying, if you want to be atmanirbhar (self-reliant) You cannot depend only on dollar debt all the time, you got to develop local currency debt and for that you need local currency long-duration savings to be unlocked.

    Do you think banks will not be able to regain their mojo because of what is happening in the world?
    In India, banks have been traditionally overvalued. The private sector banks were able to grab a lot of market share as they were smarter on technologies, smarter on risks. Now with the kind of situation we are in, everybody is trying to figure out what is the level of risk in all the banks. I think the public sector banks have taken the biggest knock which is in a way unfortunate as there could be pretty attractive values there now but for that to become interesting, you need not privatise them but you need to privatise their management in a way or the governance. I think the government is looking seriously at how to make these public sector banks a) consolidated which is going on and b) drive governance in a much more free and private sector manner. But again I will say, it is not about privatising the banks but about privatising their management and governance.

    If that happens, the public sector should really do well because they have this spread, they drive financial inclusion, they can still look at term loans and that is quite critical.

    The private sector banks have done really good jobs in the last decade or two. The challenge for them is going to be able to price risk. They have to take a lot more risk and because the public sector banks are now picking up on services. The private sector banks have had a pretty easy ride in grabbing market share from the public sector and they have to now obviously pick up the game on taking credit risk -- be it consumer, corporate or financial institutions. The last two years have shown that they have not taken much risk. They have got the cream of the business but now that is getting corrected/

    The thing that is going to save everybody is everyone is raising capital which is a very smart thing to do. I do not have rough numbers on NPAs but broadly, the banking system is in a pretty good shape if you assume that there is not a disastrous outcome after the moratorium and things are as predicted.

    The NBFC sector has shrunk. It is not easy to get leverage for them so very specialised NBFCs -- either asset based or fintech or really well run consumer NBFCs will be the few survivors and they will flourish quite a bit because they will use technology and better risk management. It is playing out nicely. Give it another year for the landscape to get much clearer.
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    2 Comments on this Story

    Dilip Mitra29 days ago
    Reliance has shown the way to industry how to think ahead of trends. Hope it will be Amazon of India in near future.
    Bhojmanb 30 days ago
    Reliance fresh supermarkets are dirty and ill managed. supply of vegetables and frozen item is not at all fresh.
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