RIL's Mukesh Ambani: Sitting pretty
in the numero uno position
the end of November, Mukesh Ambani will be listening very keenly
to three detailed business plans presented to him. Eventually
the Chairman of Reliance Industries Ltd (RIL) will pick out the
best one. No, he won't go ahead to implement it; these blueprints
have nothing to do with RIL, but will be the presentations of
the top three finalists of the MasterPlan competition, which is
just one of the events being hosted by IIM Ahmedabad students
as a part of Confluence, IIMA's annual business school meet that
will be held between November 24 and 27.
Ambani, for his part, knows a thing or two
about crafting business plans, and executing them, having masterminded
the setting up of RIL's refinery six years ago, having put together
the blueprint for Reliance Infocomm, and now the strategies for
the life sciences and retail forays. Reliance Infocomm, of course,
is now run by younger brother Anil, who's gone his own way with
chunks of the Reliance empire after a six-month long-drawn acrimonious
battle for control with his elder brother. Little wonder then
that on August 3 this year, shareholders of RIL were witness to
a rather different annual general meeting (AGM). The usual fanfare
at each AGM was of course there, although the announcement on
the demerger of the power, financial services and telecommunications
businesses-in a bid to facilitate a settlement between Mukesh
and Anil-took precedence over everything else. Shareholders now
had to contend with a new-look RIL, which had fewer businesses
and possibly would not display that invincible look that had become
RIL's trademark over the years. After all, the Reliance Group
would now be without businesses that accounted for roughly 10
per cent of its revenues. Chairman Mukesh Ambani did his best
to allay investors' fears: For one, he pointed out the demerger
would actually lead to the unlocking of value for RIL shareholders-after
all each shareholder would also get stock in the four companies
that would come into existence post-demerger. For another, the
elder Ambani stressed on the preservation of the fundamental nature
| Time Last Year...
| A year may be
just a drop in time, but that's an aphorism the Ambanis, their
three million-odd shareholders and 12,113 employees (at the
end of FY05) may not agree with. Around this time in 2004,
Mukesh Ambani blurted to a news channel that there were "ownership
issues" within Reliance Industries Ltd (RIL). What followed
was unforeseen mayhem till mid-June 2005, when eventually
the warring brothers, Mukesh and Anil, hammered out a settlement,
with each going his separate way. Before all that happened,
the Reliance Group was a Rs 1 lakh-crore behemoth, with a
major presence in petrochemicals, petroleum, polyester, power,
telecom and financial services, with RIL holding a 50.2 per
cent stake in Reliance Energy (REL), 47.2 per cent of Reliance
Capital (RCL) and 43 per cent of Reliance Infocomm's equity.
Today, with a demerger that facilitates a separation between
Mukesh and Anil on the cards, RIL is set to bear a new look.
Power, telecommunications and financial services will
not be a part of RIL anymore and will be run by younger
brother Anil, who has already announced the creation of
Anil Dhirubhai Ambani Enterprises (ADAE). RIL will be left
with its core businesses of polyester, petrochemicals and
petroleum, and an opportunity to pursue new avenues like
life sciences and retail. Chairman Mukesh is now working
on the blueprint of an integrated foray into retail, which
will straddle the entire value chain-just as he's done in
petroleum-right from procurement to warehouse management
to the shopshelves. Shareholders for their part won't lose
out as they will get shares in the four demerged entities
(one for coal-based energy activities, one for such gas-based
businesses, another for telecom and a fourth for financial
The ADAE side, meanwhile, has been moving briskly, by
acquiring stakes (strategic and financial) in companies
like Adlabs, Celebrity Fashions and Kinetic Engineering.
The Adlabs deal will make use of its expertise in film processing
and production, which will be combined with Reliance Infocomm's
mega broadband plans. The objective has been to bring "content
at the click of a finger". Anil Ambani had earlier
spoken of the potential in RCL to become a financial powerhouse
and interestingly, most acquisitions over the last couple
of months have been through it. They may have gone their
separate ways, but the Brothers Ambani are doing what Reliance
has been best-known for so many years now: Growth that's
focussed on creating shareholder value.
That's the crucial part. Over the years,
RIL's core businesses of polyester, petrochemicals and petroleum
refining have created immense wealth for the three million-strong
shareholder base. And the blueprint doesn't end there-a petroleum
refining expansion is being unfolded, and frenetic activity is
under way on the gas exploration and production front. Ambani,
at the AGM, spoke of how crucial these businesses were, and outlined
a mammoth Rs 50,000 crore investment on these businesses. The
doubling of refining capacity at Jamnagar to 60 million tonnes
will account for half of this investment. "We are setting
ourselves an aggressive schedule for the second half of the financial
year 2008-09 for completion. The full benefit of the new capacity
will be available from the year 2009-10."
the company in a sector where India has a long-term competitive
Yes, this is because there is a shortage of refineries
across the world. Overall, Reliance's strong presence in
petroleum and petrochem will make it a global player.
Does the company have what it takes to succeed in the
Yes. RIL's game plan is about making huge investments
(Rs 50,000 crore), building new businesses and acquiring
Should you invest in the company?
After the demerger stating that the true value of each
business will now be known, yes. The consensus is the RIL
stock is still undervalued and given the healthy results
for the first half of FY06, it looks a good pick.
The objective has been to straddle the petroleum
value chain and RIL's decision to put in close to Rs 18,000 crore
on upstream oil and gas exploration and production is in that
context. Ambani himself confirmed this when he said that RIL's
cash flows over the next few years would be largely expended on
the core oil and gas, petroleum refining and petrochemical businesses.
"Equally, it would be used in opening new avenues of growth,"
he added. A report put out by IDBI Capital (towards the end of
October this year) after RIL's half-yearly numbers for fy06 were
declared put a buy on the stock when it was quoting at Rs 751.
"RIL post the demerger is all set to be among the 10 largest
oil and gas companies. The company enjoys healthy operating margins,
has low gearing and strong cash flows to fund its expansions,"
| Five Things Going For The Company
| Presence across the value
chain: RIL has a presence from upstream (exploration)
to refining and marketing, going all the way to the consumer
leading to value chain domination.
Rollout of petrol pumps and the retail
domination: The mega-plan envisages the rollout of
close to 6,000 pumps across India. Eventually petrol will
be only one of the many things sold.
Petrochemicals' high quality performance:
RIL has already bought out NOCIL and SM Dyechem,
and will set up a new plant at Jamnagar to manufacture polypropylene.
Life sciences: With the healthcare
sector growing exponentially, RIL is looking to get a share
Businesses possess healthy cash flows:
This will also help the company in raising large
sums of money both from the domestic and international markets.
If Ambani's ambitions materialise on the petroleum
front, there will be more than one reason for RIL's shareholders
to smile. Notwithstanding the pressure on margins as far as the
petroleum business goes, that could well be the biggest story
from RIL (for the second quarter of 2005-06, net refining margins
have fallen to 8.2 per cent from 9.6 per cent for the previous
quarter). "The scaling up of refinery capacity will make
RIL extremely competitive on a global level. Oil and gas is an
extremely compelling story and the gas discoveries will make them
even stronger," thinks Rajiv Memani, Country Managing Partner,
Ernst & Young India. The presence in every aspect of the value
chain is certain to help RIL here and here is where the rollout
of the petrol pumps (eventually, there will be 5,849 pumps) will
give it a presence in the last mile. Memani adds that the retail
rollout will be "RIL's next big story".
So what does the demerger then imply for
RIL shareholders? According to Karvy Stock Broking's Vice-President,
Ambareesh Baliga, the demerger will not make much of a difference
to RIL's businesses. "RIL's interest in the demerged businesses
was only in the form of equity holdings. The RIL stock is still
undervalued today," he asserts.
| Five Things That Could Go Wrong
| Lack of experience in
retail: Considering this contributed significantly
to the troubled launch of Reliance Infocomm's wireless services,
RIL must be ensuring that it gets it right on its retail plan
this time around
Refining margins under pressure:
Though scalability is not an issue with RIL, there
have been pressures on refining margins. With volatile crude
oil prices, this is surely an area of concern.
The subsidy burden: RIL has
refused to share the subsidy that is today borne completely
by the government. If it is forced to share this, profits
could see a downside.
Original integration strategy may
have to be reworked: This initially outlined the
strategy from the gas well all the way to electricity. With
Reliance Energy not a part of RIL anymore, this strategy
will have to be looked at afresh.
Payout on RIL's holdings in demerged
entities: As RIL's holdings in the energy, telecommunication
and financial services businesses are untangled, some of
Reliance's reserves may have to be sacrificed.
The rollout of the petrol pumps (these will
also offer basic services like food and beverages, and recreation)
could well be just one piece of the bigger picture Ambani has
for retail, which could be to create huge malls/shopping complexes.
According to Rajeev Thakkar, Head of Research, Parag Parikh Financial
Services, retail holds out great promise for RIL, although it
will also prove a challenge. "But it is here where RIL's
project execution skills could be useful," he states. A Citigroup
report released in August this year points out that in the overall
retail industry in India, organised (and modern) retailing accounts
for just 3 per cent. "Rising incomes, favourable demographics
and changing consumer tastes are driving growth at more than 30
per cent for modern retail formats," it adds. And like any
other Reliance project, this too is said to be massive in scale
and according to Memani, it is RIL's ability to scale up effortlessly
that makes it a globally competitive player.
The mega-plans will also pervade into the
life sciences sector, which Ambani terms the "next major
initiative". Obviously, he has set his eyes on the emerging
health care market, which is an astronomical $4.5 trillion (Rs
2,02,50,000 crore) in size globally. It is learnt that there will
be a couple of announcements from this segment over the next couple
of months. So, what will this foray be all about? According to
Ambani, RIL intends to incubate an innovation-driven biotechnology
business. "It also helps serve unmet needs in medicine, agriculture,
industry and the consumer. Life sciences would help RIL in engaging
directly with the consumer, stabilise cash flows and create new
RIL's ability to go global has rarely been
in doubt and Ambani has always spoken of the need and ambition
to become a significant player in every segment it operates. "RIL
has always changed the global paradigm in every sector it operates
in," quips Memani. The value-creating engine just doesn't