Wesfarmers Ltd (ASX: WES) is a listed Australian conglomerate company, which has a market cap of A$53bn. The company’s share price has moved sideways for the last five years.
The business has a substantial component of its business coming from Retail, with stores like Coles Supermarkets, Target, K-Mart, Officeworks, and the extremely popular Bunnings.
Wesfarmers: The Largest Company By Revenue
Wesfarmers, founded in 1914 as a co-operative to provide services to WA farmers, has a rich history in Chemicals, Resources and Retail, and is now Australia’s largest company by revenue.
The company has grown profits by 5.3% per annum over the past four years and it pays close to a 5% fully franked dividend yield at a 90-95% payout ratio, reflecting a more mature business profile for its businesses.
With 90% of revenues coming from retail brands and Australian retail sales growing at 2.5-3.5%, according to ABS data, I think it is likely that profit growth will come from lower costs, synergies and market share gains.
Australia’s 2018 retail sales stood at $316 billion. The Wesfarmers group have 20% market share of this, over 30% of Supermarket sales and over 40% of Department Store sales. Given the incumbent position of Wesfarmers across the industries it operates in, profitability growth is driven by operational efficiency, inorganic acquisitions and synergies.
Growth
Australian business conditions dictate that its business strategy is more about staying ahead of its rivals by increasing market share through productivity, rather than sourcing new areas to grow through horizontal or vertical integration or inorganically.
In contrast the share price of Reliance Industries (NSE: RELIANCE), India’s largest company, has accelerated substantially over the past 5 years as the Oil & Gas business has expanded product lines to include Telecom, Mobile Subscribers, Media and Retail.
The stock price has risen by 18.1% per annum over the period as India’s growth and market size is significant. Being in a bigger market could allow investors to afford greater stock price multiples.
Dividends
Reliance pays shareholders a dividend yield of less than 1%, as the clear aim is for growth. For example, India’s retail market is expected to increase by 60% to reach US$1 trillion, driven by rising incomes, changing lifestyles and increased digital connectivity. The retail market is expected to grow at 12% p.a.
India is also expected to be the world’s fastest growing e-commerce market driven by investments and internet penetration.
Reliance Jio, which started operations with free voice and data in September 2016, now has 187m mobile subscribers and is the world’s fastest and largest growing mobile data network. Reliance retail also added 86 stores to reach 3,837 outlets across 750 cities and the last quarter’s result saw pre-tax earnings soar 209% – good luck WalMart (NYSE: WMT) and Amazon (NASDAQ: AMZN)!
From the face of it, Reliance is in the process of transitioning from an Oil and Gas refining company, making US$11 on refining margins (a process of converting oil to fuel), towards a conglomerate benefitting from explosive growth rates across India.
Going forward the company is in the eye of the perfect storm, producing and refining more oil and gas as cash flow which drives the growth of retail, digital penetration and content dissemination.
Valuation
Reliance trades on a P/E of around 12x as its business is still largely cyclical and driven by Refining and Petrochemicals (compared to Wesfarmers at 18x). The transition towards a significant player in mobile and telecom is underway, and retail is on its way, which should not only lift the multiple of the company but also help it grow sustainably.
Try to find an Aussie stock in the top 5 market cap, let alone the largest, with a similar growth and opportunity profile to Reliance. It’s certainly made company Chairman, Mukhesh Ambani, owner of 45% of the company, the richest Indian in the world.
Reliance Industries is one of the top 10 stocks in our India Avenue Equity Fund. You can find out more about the Fund at www.indiaavenueinvest.com
This article was written by Mugunthan Siva, Managing Director of India Avenue Investment Management (AFSL: 478 233).
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Disclaimer: This article contains general information only and should not be relied upon. The information does not take into account your needs, goals or objectives, so consult a licensed and trusted adviser before you act on the information. Past performance is not a reliable indicator of future performance.
