MUMBAI (Reuters Breakingviews) - Reliance Industries' rise challenges assumptions about what investors want from India's corporate giants. After four years, Mukesh Ambani's $70 billion flagship firm is on the verge of reclaiming its mantle as the country's most valuable company from IT giant Tata Consultancy Services. India’s richest man is reaping the rewards of massive risk taking.
Investors view Reliance, with its petrochemicals and refining business, as an old-world company, with all the headaches that entails: heavy spending needs, exposure to swings in commodity prices, and a sprawling mix of businesses.
TCS, meanwhile, epitomises the new economy, as a focused, asset-light business. Since floating in 2004 it has grown to become one of the world's biggest IT outsourcers. The younger behemoth has also delivered total shareholder returns of nearly 400 percent over the past decade, more than three times its more established rival, an Eikon analysis suggests.
Yet a near 30 percent share price surge this year puts Ambani's empire within reach of the $74 billion market value of TCS. The latter has gained barely 3 percent, while the broader benchmark Nifty Index has increased 13 percent.
Graphic: Reliance Industries closes in on TCS: reut.rs/2o36P3N
Right now, a rising oil price works in Reliance's favour. The company is also near the end of a five-year investment cycle, worth $39 billion. That spending has doubled its capacity in petrochemicals and – in classic conglomerate style - financed a rollout of the country's fastest mobile network, a totally unrelated business. The telecoms gamble seems to be bearing fruit. The upstart Jio service has somehow managed to convince a higher-than-expected 72 million subscribers to start paying for a service they previously got for free.
Meanwhile, TCS has discovered it is not free from political risk, traditionally more of a concern for old economy stocks, as investors fret about the impact of stricter U.S. visa rules.
Jal Irani at local brokerage Edelweiss reckons Reliance will turn free cash flow positive in the year to March 2018. Higher dividend payouts could follow. Investors, though, may have got carried away. Reliance already trades 10 percent above its mean target price forecast by analysts, whereas TCS trades 2 percent below its target, Eikon data shows. Ambani's gutsy reinvention of Reliance has the market’s full attention.