Companies & Sectors
Reliance Industries neglects core strengths, seems to be in a ‘Diworsification’—or diversifying for the worse—phase

The company’s scrip has languished over the past year due to its inability to execute the massive diversification exercise that it has already launched, in retailing. And now Reliance is looking at further forays into uncharted areas—power generation, fertilizers, cement and the overcrowded telecom sector. Its projected growth rate is also not very promising

The term 'Diworsification' may sound a little absurd and unusual; but it has been coined by legendary fund manager Peter Lynch of Fidelity Magellan Fund. He argues that at some stage of its operations, a company starts diversifying its line of business and enters new territories.

As per his analysis, such diversification happens in unchartered areas and leads to the worsening of a company's profitability and growth and hence more often it is 'Diworsification'—i.e., diversifying for the worse.

The same seems to be the current phase which Reliance Industries is going through—the Indian stalwart with a staggering market cap of over
Rs3 lakh crore. Since its AGM (Annual General Meeting) in June 2010, the stock has fallen by something over 10%, while the Sensex has gone up by around 12% for the same period. Indeed, the stock is below what it was exactly two years ago—when the Sensex was at 12,600!

The main reason behind this underperformance over the past one year is the company's inability to execute the massive diversification exercise that it has already launched—in retailing. And now Reliance is looking at further diversification.

Last year, at the AGM, the company's head Mukesh Ambani unveiled a large number of new business plans, and most of them were into areas which were beyond the core strengths of the company, which is mainly into textiles, petroleum, chemicals and allied products. The company plans to enter segments like power generation, fertilizers, cement and the worst of all, the already overcrowded telecom sector.

Moreover, Mr Ambani also said that over the next decade, Reliance plans to double its total enterprise value and also received great applause for this statement from his shareholders. However, a simple back-of-the-envelope calculation will reveal that doubling enterprise value over 10 years is not that big a deal. If Reliance doubles its enterprise value in 7-8 years (this is an optimistic estimate) this means a Compounded Annual Growth Rate (CAGR) of around 9%-10%. So for an investor, Reliance is an investment which promises to offer around 9%-10% compounded growth over the next 8-10 years, only slightly better than the current bank fixed deposit rate of over 9% (which is almost risk-free).

Hence, the risk premium which an equity investment should offer is missing in Reliance and thus this is another strong reason for its underperformance.

RIL has underperformed and may continue to underperform. Why would a fund manager allot premium valuations for a company, which on the one hand is entering into new segments beyond its core competency, and on top of that, is saying that it would only grow at around 9%-10% compounded growth over the next 10 years or so?

An investor—or a fund manager-would rather buy faster-growing companies and examine the prospects of RIL which Mr Ambani is highlighting. RIL is one of the largest institutionally—held Indian stocks, both in India and globally, but no global fund manager will be foolish enough to pay 17 times P/E multiple for a company with this kind of expected growth rate and a 'Diworsification' business model.

Hence, the current correction is no signal to buy RIL; it's just the P/E re-rating which is happening... and which will continue to happen.


ING Life Insurance reports Rs70 crore loss in FY’11

For the fourth (January-March) quarter of the FY’11, ING Life Insurance clocked a net profit of Rs7 crore

Private sector company ING Life Insurance reported a loss of Rs70 crore for the financial year ended 31 March 2011, halving it from the previous fiscal.

For the fourth (January-March) quarter of the FY’11, the company clocked a net profit of Rs7 crore, ING Life said in a statement.

The company is well on track to achieve its break-even plan by 2013, it said.

“Our solid results have come at a time when the industry has seen steep decline in new business. The results have been achieved because of our sharp focus on building efficiency, offering balanced product portfolio and keeping strong check on our costs,” ING Life India MD & CEO Kshitij Jain said.

The company said it expects its premium income to grow by 17% to Rs2,000 crore in the fiscal 2011-12.

“We are aiming to achieve a premium income of Rs2,000 crore in FY’12. We have invested towards strengthening our product and investment management, partner relationships. These are showing positive momentum,” Jain added.


Tata Motors launches Tata Magic IRIS and Tata Ace Zip

Tata Magic IRIS, BSIII version, is priced at Rs1.95 lakh

Tata Motors has launched the ‘Tata Magic IRIS’, a four-wheel, 3-4 seater small passenger carrier, safe and comfortable alternative for commuters who depend on three-wheelers. The company has also launched ‘Tata Ace Zip’, a technologically superior and smart micro truck with a payload of 600kg for deep-penetration door-to-door goods movement. Both the vehicles offer superior profitability to their owners.  

PM Telang, managing director-India operations, Tata Motors, said, “Tata Motors has been a pioneer in creating and growing the small commercial vehicles market in India with the Tata Ace and the Tata Magic. With the introduction of the Tata Magic IRIS and the Tata Ace Zip the company will more comprehensively address the burgeoning need of public transportation and goods movement. Their quality, affordable pricing and competitive maintenance cost throughout the life-cycle will further foster self-employment in the country.”

Tata Magic IRIS, BSIII version, is priced at Rs1.95 lakh, ex showroom Thane (without octroi).

In the late afternoon, Tata Motors was trading at around Rs1,209.90 per share on the Bombay Stock Exchange, 2.01% up from the previous close.



sameer solanki

5 years ago

i like this products for tata

We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)