Reliance Energy's a-team: (Standing, left to right) Rakesh Agarwal, CEO ( Delhi Discoms), Satish Seth, Executive Vice-Chairman, Anil Ambani, CMD, Amitabh Jhunjhunwala, Director, Lalit Jalan, Head (Mumbai Distribution Business); (sitting, left to right) Subodh Shah, Head (Regulatory Affairs), J.P. Chalasani, Director (Business Development),S.C. Gupta, Director (Operations)

RELIANCE ENERGY'S GROWTH STRATEGY

» Own the consumer by straddling generation, transmission and distribution of power » Capture emerging gas-to-power opportunity by leveraging huge gas finds » Build world-scale power plants like the proposed 3,500 MW gas-based one in UP » Target distribution as state governments privatise operations beginning 2004 » Invest Rs 20,000 crore over next five years in generation, distribution and trading

Between August and December of last year, the chief ministers of Uttar Pradesh, Delhi, Haryana, Karnataka, Andhra Pradesh, Maharashtra, Gujarat and a couple of other states sat through-separately, of course-a presentation made by Anil Ambani. At each of these multiple-hour sessions, a characteristically impassioned and charged-up Ambani, assisted by a posse of handpicked lieutenants, made a case for Reliance's role in the power sector of each of these states. The timing was perfect. The Electricity Act 2003 had just been passed, ushering in sweeping reforms in power, de-licensing generation and opening up transmission and distribution to the private sector. Meanwhile, Reliance had consolidated its control over the Bombay Suburban Electricity Supply Ltd. (BSES), a Rs 2,826-crore power company (renamed Reliance Energy Ltd in late February). This is the company that, with Anil Ambani as Chairman and Managing Director, will spearhead the Rs 80,000-crore Reliance group's first serious foray into the power sector.

The sales pitch worked, for starters in UP (The alacrity with which the state responded may have something to do with Ambani's closeness to Amar Singh, Samajwadi Party's General Secretary and UP Chief Minister Mulayam Singh Yadav's Man Friday). On February 22, Reliance Energy announced that it would set up the world's largest gas-based thermal power plant with a capacity of 3,500 mw in Dadri, Western UP. It also announced that it would invest Rs 20,000 crore (Rs 11,000 crore for the Dadri project and the rest in other projects across the country) over the next five years. On the same day, the newly christened Reliance Energy unveiled a swank new corporate identity with bright orange as its corporate colours and a slogan that pithily says 'Energy is Life'.

Two weeks later, sitting in the boardroom of the swiftly refurbished Reliance Energy House in suburban Mumbai, looking amazingly fit at 44, Ambani gushes, his eyes all lit up, about the huge opportunity he sees in the power sector. "The Electricity Act, 2003," he says, "is the single most important piece of economic legislation in the history of independent India." Isn't that going a tad overboard? Not if you see the Act in the context of Reliance Energy's plans. It fits in perfectly. You could say, propitiously.

The Integration Mantra

To those familiar with Reliance's growth since the late 1970s, this will not come as a big surprise. In petrochemicals, the late Dhirubhai Ambani grew Reliance by leveraging backward and forward integration: it began with manufacture of textiles and fibres, moved to polymers and other intermediates that went into the manufacture of fibres, then to petrochemicals and oil refining. In 2002, with its big hydrocarbon finds off the coast of Andhra Pradesh, it integrated even further backwards into oil and gas exploration, thus, straddling all the segments of the value chain.

"Once you own the customer, then you can integrate backward into generation of power" Satish Seth, Executive Vice Chairman, Reliance Energy

Two years back, when Anil's elder brother, Mukesh, led the group's telecom venture, the pattern was similar. Reliance Infocomm, which built up a subscriber base of 7 million in just 10 months, is present everywhere across the infocom value-chain: from submarine cables and nationwide optic fibre networks that provide bandwidth to a triple-play that involves reaching voice, data and video to retail and corporate consumers.

In power, Anil Ambani wants to do the same thing. And he's coined a catchphrase for it: 'from well-head to wall-socket'. Reliance Energy's strategy is to straddle the entire value chain in the power business. It will generate power leveraging the group's production of gas, transmit and distribute it to the retail and industrial consumer, reaping the returns of not just generating power using its own gas but selling what it generates not as a bulk supplier but to the end user.

All of that fits cosily into the framework provided by the Act that Ambani terms a "historic" one. With generation freed up and the private sector allowed open access to existing grids and several state governments increasingly inclined to privatise distribution, there could not be a better time for a strategy like Reliance Energy's, or for that matter, other players. Says Reliance Energy's Director, Business Development, Jayarama P. Chalasani: "The Act matches our basic strategy. It provides the enabling framework and we bring in the project management capability."

"The Electricity Act, 2003, matches our basic strategy. It provides the enabling framework and we bring in the project capability" J.P. Chalasani, Dir. (Business Development), Reliance Energy

Reliance Energy's strategy is also in sync with the group's time frame for generating gas from Kakinada (Andhra Pradesh). The 3,500 mw Dadri plant is expected to be commissioned in phases between 2006 and 2008, precisely the time when Reliance Industries' gas pipeline from the east coast to Hazira in Gujarat (where Reliance has its petrochemicals complex) will be ready. Already, a GAIL pipeline exists between Hazira and Dadri.

Few have doubts about Reliance's project building capabilities given the scale and size of its refinery at Jamnagar or the petrochem complex in Hazira or the impressive rollout of its telecom services. And most observers agree that the 'well-head to wall-socket' strategy is the way to go. Says Vedamoorthy Namasivayam, Director and Head of the power division at PricewaterhouseCoopers: "For a company to be successful (in the power business) today, it has to straddle the value chain, especially distribution since this is where most of the losses occur."

Owning The Customer

Reliance Energy's executives like to emphasise that phrase. Says Satish Seth, Executive Vice Chairman: "Once you own the customer then you can integrate backward into generation of power." Although Reliance Energy has around 900 mw of installed capacity, it is basically a distribution company, supplying electricity to 25 million consumers in Delhi, Mumbai, Andhra Pradesh, Kerala, Orissa and Goa. And it sees its entry into generation as a backward integration.

A FAMILIAR PATTERN: RELIANCE'S SWAMP STRATEGY

PETROCHEMICALS: Reliance straddles the entire value chain from oil exploration to refining to manufacture of petrochemicals, plastics, synthetic fibre and branded textiles

INFOCOM: From submarine cables and optic fibre networks to a triple-play involving reaching voice, data, and video to retail and corporate consumers, Reliance is everywhere

POWER: Reliance will only generate, but distribute, transmit and trade in power, using gas from its own wells at one end and reaching retail consumers at the other

Distribution will continue to be a thrust area for the company. Reliance Energy is looking at another 10-15 distribution circles in several states, including Andhra Pradesh, Karnataka, Madhya Pradesh, Rajasthan, Uttar Pradesh, Punjab and Tamil Nadu, many of which have already unbundled distribution from their state electricity boards and are on the route to privatising them. "There is tremendous opportunity; there is tremendous scope," says Ambani, "I think we are merely scratching the surface of the true potential of the sector." That's probably why 500 mw wind farm projects are on the cards in Maharashtra, Rajasthan and Karnataka. But Reliance isn't the only private sector company to be excited by the opportunity in power. Recently, Tata Power announced a string of projects that could involve investment of Rs 10,000 crore over the next five years and it is eyeing the very same states for distribution that Reliance is.

Distribution is a services business and something that is new for Reliance. Ambani talks of creating "total customer experience" and of branding power. "Customers will experience many new product offerings like 'time of the day' tariffs and 'interruptible' tariffs, whereby they can optimise their overall costs for power depending on their needs. Our customers will see a wide bouquet of offerings and services, and will experience world class service." Recently, for its Mumbai customers, Reliance Energy launched a new all-colour electricity bill that is easy to read, uncluttered and convenient with information including six-month billing history, payment options, energy calculator and tips.

Independent Play

The potential in the power business in a country where the installed capacity is a mere 105,000 mw and nearly half the geographical area does not get any electricity cannot be under-emphasised. Yet the younger Ambani's excitement about Reliance Energy is perhaps not just because of business opportunities. It is the first time he's independently handling a major business. In the nearly two years since Dhirubhai Ambani's death in July 2002, rumours of a rift between the two Ambani brothers-Mukesh (46) and Anil (44)-have been rife. The fact that the group's massive telecoms venture was led by elder brother Mukesh with Anil (who is Reliance Industries' Vice Chairman and Managing Director) virtually uninvolved in that project lent credence to such speculation.

Against that backdrop some see Reliance Energy as Anil's own show. After all, even though the Reliance group owns more than 52 per cent in the company, it's only Anil and some of his senior executives who are on the board of directors, not Mukesh. Besides, the core management team comprises handpicked Reliance veterans known to be loyal to the younger Ambani.

With generation freed up and private sector allowed open access to power grids, there could not have been a better time for reliance's energy thrust

Anil explains it as the two brothers taking different "leadership responsibilities". "Each of us is being the prime sponsor and taking the responsibility by specific sectors. The challenges are so vast that Mukesh and I will take the leadership initiative in the various spaces. For example, Mukesh has taken the leadership initiative in the infocom space, while I will shoulder the responsibility in the energy space." It doesn't mean, he adds, that the brothers don't work together. Anil continues to be the group's face to investors and affirms that he's always involved in resource raising or financing strategies while Mukesh is involved in the group's technical or project implementation activities. Yet, insiders see Anil's leadership in the power business as the younger Ambani coming into his own. Comments one of them, light-heartedly: "It's a big thing for him; it's like getting ready for his first prom night."

Meanwhile, back on the bourses, Reliance Energy is a hot stock for analysts tracking the power sector. Most believe it is a long-term investment. Says Srinivas Rao, senior analyst, Motilal Oswal Securities: "It's a three-to-five year story with the most lucrative opportunity in distribution." Adds Susanta Mazumdar, analyst, UBS: "The only risk factor in the strategy is the timing-when will the state governments allocate new distribution licence areas and how it will shape up."

"Privatisation has already begun in half a dozen or more states and it isn't going to be reversed. So we see it as a win-win situation" Amitabh Jhunjunwala, Director, Reliance Energy

That, says Reliance Energy Director Amitabh Jhunjhunwala, is not much of a risk. "Privatisation has begun in half a dozen or more states and the process isn't going to be reversed. So we see it as a win-win situation." Adds Ambani: "The challenges for power reforms especially in distribution in various states are vast and the private sector participation in distribution has a huge potential. Even if one state in India opens up this sector every year, this will be a value creating opportunity for the customers and the state." The stockmarket seems to think so too. Although the Dadri project is fully financed by a combination of debt and a preferential equity issue, it is still just a foundation stone. Besides, there are still some policy-related sticky points. Dealing with state regulators who will determine tariff rates is one. Then, there's the issue of cross-subsidised tariffs where industrial consumers subsidise household consumers. Both these could pose hurdles to Reliance's plans to distribute power at low prices-a key factor in its strategy to build scale. Moreover, much of Reliance Energy's plans are well into the future and many still dependent on government policy. Yet, since January 18, 2003, when the erstwhile BSES became a part of the Reliance group, Reliance Energy's market capitalisation has quadrupled from Rs 3,062 crore to Rs 11,537 crore, an indication of what the market thinks of its future.

At Reliance Energy House in Mumbai's Santa Cruz, major changes are under way. The six-storey building has a new orange façade with the new logo and slogan. Dull, old, PSU-style office layouts have given way to modern open offices; everyone's business card is snazzier, and there seems to be a never-ending gaggle of young recruits every day. The company is on a hiring spree, signing on dozens of new recruits at every level on a daily basis. Many of the youngsters who've joined seem as excited as the top management. Says Vipin Naik, an IIT-Delhi, iim-Bangalore grad who's switched from a big liquor marketer to join what is a really an utility company: "It's good to be in a place where the private sector has taken charge of what was once a state-owned company and is changing its operations completely." Says Ambani: "We are hiring hundreds of bright, young minds. Intellectual capital is in abundance in India. In the past, this sector did not have growth opportunities and thus did not attract highest calibre people." With an investment plan of Rs 20,000 crore Reliance-style, the risk of that happening now seems remote.

-additional reporting by Ashish Gupta & Roshni Jayakar