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[ Contn. ] The Empire Strikes Back Leveraging The Old
Sometimes it's unnerving how similar Reliance's new businesses strategy is to that of its oil and petrochem business. In petrochem, until very recently, when it bought four ailing polyester plants-India Polyfibres, Orissa Synthetics, Raymond Synthetics, and DCL Polyester-at throwaway prices, Reliance shunned inorganic growth, preferring to build rather than buy. During the recent spate of mergers and acquisitions in the cellular services arena, Reliance Telecom chose to be a spectator and not a participant. The simple reason for that, says Reliance, were the sky-high valuations. Emphasises Ambani: ''Our view from the beginning was clear. We were not here to pay high valuation. For an Orange it may be part of their global consolidation, but that is not the case with us. So we stayed far away from this and said we do not believe that these values can be sustained. So neither did we do an IPO or a private placement, nor bring a financial or strategic investor.''
Reliance believes its bidding strategy for cellular licences-bid low prices for less glamourous, low teledensity circles-has paid back. ''We bid low licencing fees because we said that the best deals should be given to the consumers. If I pay millions of dollars to the (erstwhile) dot (in licence fee) then I know I have to recover that from the consumer. So actually, I am going to burden my customer.'' Reliance Mobile's current subscriber base is 163,000 spread over 76 cities. While that doesn't match up to a BPL's 272,649 in Mumbai or an Airtel's 312,114 in Delhi, Reliance claims its subscriber base is growing faster. Against an industry growth of 74 per cent in April 2000-January 2001, Reliance Mobile has clocked a growth rate of 136 per cent. What's more, although it won't share the numbers, it claims to be the only cash positive cellular operation in the country apart from the Delhi-based Bharti Cellular. The telecom strategy even has the support of a number of investment bankers, which probably explains why despite the hype and the hoopla over infotech stocks, RIL was the top Sensex performer for the calendar year 2000 and (together with sister company RPL) enjoys a weightage of 24 per cent in the BSE Sensex. Says S. Sharma, Managing Director, Prime Broking: ''RIL has played the entire mobile and basic telephony business to the hilt. It chose to concentrate on the less glamourous parts of the pie focusing on long-term value. The fact that they've entered at low entry costs means it'll be easier to generate returns.'' Getting It To Work Reliance expects its new businesses to start paying back faster. And although it declines from making forecasts, analysts expect to see rapid topline growth. Revenues from voice traffic alone in India's telecom market (currently dominated by MTNL, VSNL, and BSNL) are expected to grow from Rs 45,000 crore currently to Rs 75,000 crore in the next three years. If data traffic, which is expected to constitute around 25-30 per cent of the total revenues three years from now, is factored in, that means a total pie size of more than Rs 100,000 crore. Reliance is targeting a third (or Rs 33,000 crore) of that revenue. Analysts peg Reliance Infocom's turnover at around Rs 40,000-50,000 crore by 2006. Incidentally, that is the group's current turnover. What of competition? Although there are 17 players vying for an entry into basic telephony, the only serious competition Reliance will face is from the only well-entrenched player, BSNL. And, although basic services need huge capital investments, Reliance is best positioned to raise that kind of money. In its back-end business of building a nationwide broadband backbone, it has virtually no competition, with other players like Zee and BPL withdrawing or downsizing their original plans. The missing link in Reliance's gameplan is international connectivity, where it will either have to lease submarine connectivity or build such capacity. The alternative is to try to acquire VSNL, which, until recently, part-owned and managed the only gateways out of India, and is up for disinvestment. The Ambanis admit that as an option available but are worried by the possible valuations. ''Yes, that's an option. In the past, Reliance did not get such an opportunity to ask 'Can I buy a refinery instead of building one?' But everybody looks at VSNL and thinks it is going to be outrageously priced and there again you come into build or buy decision. Why would you buy VSNL at two-three-four or five thousand crore? Why don't we put all that money into Reliance Infocom and do whatever we want to do of our own?'' Which way the dice will roll for Reliance's New Economy foray will, however, depend not on its money muscle or project management skills but on how it manages the other parts of the value chain. The business of bandwidth is, at the end of the day, a commodities business. It's the quality and reliability of services that Reliance offers that can guarantee returns. The real value-creators in telecom are brand, customer service and technological innovation. Plus, Reliance will have to keep in mind that the model it is trying to follow-of keeping the entire value of the phone call with itself-may be similar to its vertical integration in polymers, but it hasn't worked anywhere in the world. First, regulators have forced operators to split their business, since that's anti-competitive. And then, there's been market pressure from specialised smaller players providing last-mile services. Reliance, of course, responds by pointing to its track record in RIL and RPL. Says Anil Ambani: ''We came from behind in petrochemicals and competed with IPCL, GAIL and others; we came from behind in polyester and took on the existing players like Baroda Rayon, Nirlon and others. So I don't think that's an issue now.'' He's right; it isn't. The real issue concerns Reliance's response to the global trend of consolidation in the telecom sector. Its competitors will be focused, true, but they'll be specialists operating across countries. Unlike the business of petrochemicals, oil, and power, where it's possible to operate at a global scale locally, the business of telecom is rapidly becoming global in both intent and action. Apart from acquiring a strategic stake-some analysts say 14 per cent-in WorldTel, which lists the wiring up of third world countries as one of its objectives, Reliance hasn't unveiled its global telecom plans yet. There'll surely be a sequel to this story. -Additional reporting by Ranju Sarkar & Abir Pal 1 2 |
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