New Delhi: Investors concerned that Reliance Industries Ltd chairman Mukesh Ambani’s lack of retail experience will be a handicap should think again.
The Mumbai-based company is investing $6 billion (Rs24,000 crore) in the stores, supported by record profits from operating the world’s third largest oil refinery.
The stores are opening as India’s retail sales surge, rising as much as 35% a year driven by a burgeoning middle class.
The supermarket chain’s sales will reach $25 billion by 2011, Reliance forecasts, more than its total revenue last year.
The growth, combined with profits from oil, will drive Reliance shares to Rs2,060 in the next 12 months, Goldman Sachs Group Inc. analysts said in a 18 June note. That would be a 21% gain from Thursday’s closing price.
“They have entered a virgin area, very, very early, which is growing at a phenomenal pace,” said Chakri Lokapriya, who manages $470 million in shares, including Reliance, at BNP Paribas Asset Management UK Ltd in London.
Reliance shares are up 34% already this year, giving the company a market value of $59 billion. The company’s net profit reached Rs10,900 crore in the year ended 31 March.
Reliance is getting into the market before Wal-Mart Stores Inc., the world’s biggest retailer, because the government doesn’t currently allow foreign companies to open supermarket chains in the country.
Carrefour SA and Tesco Plc., Europe’s biggest food retailers, have also expressed interest in entering the market.
Retail outlets owned by foreign firms that sell only a single brand of products are permitted.
The jockeying comes as economic growth in India is creating a large middle class.
By 2010, there will be 65 million middle-income households, up from about 40 million last year, according to McKinsey & Co. estimates. “The economy is growing by more than 9% and even if Reliance takes between 20-25% market share of the organized retailing, they will still have a very huge business,” said Suhas Naik, who manages the equivalent of $100 million in stocks, including Reliance, at IL&FS Ltd in Mumbai.
For now, most produce shopping takes place on street corners where pushcart vendors jostle with each other for space. Such outlets control 96% of the country’s retail market, according to New Delhi-based consulting firm Technopak Advisors Pvt. Ltd.
Reliance and other retailers, such as Pantaloon Retail India Ltd, want to change all that. Reliance’s stores sell vegetables, fruits and even flowers used for offerings to Hindu deities under one roof. The stores also sell staples such as sugar and rice for less than the neighbourhood stores.
Other companies are following suit: Bharti Group and Aditya Birla Group are among other companies that are starting nationwide retail chains. Reliance spokesperson Tushar Pania declined to comment on the company’s plans.
Street vendors and some politicians are fighting the trend. The government’s communist allies oppose any opening to overseas retailers on the ground that it will displace small retailers and hurt the livelihoods of those who work there.
The Congress, which leads the ruling coalition, wants to have safeguards in place before it allows foreign investors greater access to the nation’s retail industry, which accounts for about 7% of the Indian workforce.
Others have taken a more violent approach. A group of protesters belonging to the Indian Justice Party stoned a Reliance store in New Delhi last month. “We feel that big companies shouldn’t enter the retail business be it Indian or foreign,” said Udit Raj, chairman of the party, in an interview in New Delhi.
Reliance Fresh outlets in Ranchi and Indore have been attacked by traders. Traders also went on protest marches in Ahmedabad against retail chains, including those of Reliance, PTI reported.
(Lauren Coleman-Lochner in New York contributed to this story.)