labels: industry - general, reliance industries, investment - general, m&a
Which Ambani has won?news
Rex Mathew
20 June 2005

The markets seem to give a slight edge to the Anil Dhirubhai Ambani Enterprise.

After months of wrangling, and Mukesh and Anil Ambani have arrived at an arrangement to split the business house their father Dhirubhai built. Which brother has benefited more from the so-called settlement?

Assuming that there will be an asset division on the same lines as the division of responsibilities, most analysts reckon that Anil Ambani has benefited more as the businesses he has been allocated have far higher growth prospects and, therefore, would enjoy better stock market valuations.

Airtel is better
Anil gets the second largest private mobile telecom company in the country after Bharti TeleVentures, a sector which still has a lot of room to grow and will be dominated by the larger players. If one were to add the over one million GSM subscribers of Reliance in the eastern parts of the country and another million-and-half subscribers of fixed and fixed wireless services, the total subscribers of Reliance Infocomm almost matches Bharti's.

However, as a business Reliance Infocomm pales in comparison with Bharti. Its services under the Airtel brand enjoy a much better brand image than Reliance Infocomm. Average revenues per subscriber of Reliance are much lower than Bharti's and so is the quality of service. Going by current performance, Reliance would take quite some time to match Bharti in net cash inflows. Reliance's global under sea telecom cable network, Flag Telecom, is yet to generate significant cash flows.

Bharti's market value is close to Rs43,000 crore. Assuming that Bharti is fully valued at present and considering all the factors above, Reliance Infocomm could fetch a ballpark valuation of between Rs25,000 to Rs30,000 crore. It is difficult to arrive at a more precise valuation as nothing much is known about the financials, apart from total revenues and profits.

Fair value
Reliance Energy is one of the largest private sector players in power generation and distribution with a current market value of over Rs11,000 crore. It is cash rich and the distribution businesses have achieved some stability. Further investments in existing businesses can be met from internal accruals.

It has large investment plans in power generation. The proposed investment in UP and Orissa for new thermal plants is to the tune of over Rs60,000 crore. Clearly, the company would not be able to manage such requirements from internal accruals and will have to raise fresh capital.

Considering the possible future capital dilution, the company is fairly valued.

Reliance Capital is more like an investment company these days. Anil Ambani says he wants Reliance Capital to be among the top three financial services companies, including banks, in the country. That is quite a tall ambition!

The company can grow in segments like home mortgage, retail finance, insurance, fund management, etc. But competition is very high in each of these segments with more and more players, including global majors, coming in. It will require a lot of hard work and more importantly significant investments to be among the top three.

Reliance Capital can possibly buy its way to the top. Anil has already committed Rs2,000 crore of personal investment in the company. However, the policy framework on takeovers in the financial sector is restrictive. Large corporate houses are not allowed to hold banking licenses. Even if such licenses are issued in the promised liberalised scenario after 2009, Reliance Capital will have to compete with many competitors with deep pockets in acquiring small banks and finance companies.

Though Anil will be operating in three very exciting sectors with tremendous growth opportunities, his success would depend on his ability to raise large financial resources.

There is no denying the fact that he has a flair for fund raising and has been instrumental in tying up the financing of some of the large projects of Reliance Industries. But can he repeat that performance without the huge cash flows of Reliance Industries to assure potential investors?

A possible cash payment to Anil for giving up his stake in Reliance Industries would help his group with part of the required funds. As for the balance, much would depend on his ability to improve cash flows from the telecom business.

On the other hand Mukesh gets a well integrated behemoth with a brutally dominant market share in petrochemicals. After shedding the drag which is telecom business, Reliance Industries and IPCL will have combined cash flows of close to $3 billion every year. The cash flow is sustainable to a large extent as not many companies, including global majors, can possibly think of challenging Reliance at the top in the domestic market.

Reliance already has a reasonable global presence in petrochemicals and the scope for further global expansion is significant as production will shift to more competitive locations like India. Even if there is a reversal in the petrochemicals cycle in future, the cash flows from the refinery and oil and gas production would more than compensate for it.

Even though petrochemicals and oil are among the most commoditised businesses, they still offer significant opportunities in the country. India's energy needs are growing rapidly. Domestic oil exploration may still lead to significant finds like the recent gas finds by Reliance in the KG basin. Fuel retailing in the country is relatively under-developed.

Reliance is already in the process of expanding its petrochemical capacities. It is reportedly contemplating an enhancement of its crude refining capacity to over 60 million tonnes per annum which would take it closer to Indian Oil, the country's largest refiner. By next year, Reliance would have around 6,000 retail fuel outlets and in a couple of years it would be the second largest fuel retailer behind Indian Oil.

The company has already made significant discoveries of natural gas in the east coast. It has minority stakes in some crude producing fields in the western parts of the country. The next big push will come in acquisition of overseas oil assets for which the company has formed a senior management team headed by the former head of ONGC Videsh.

Mega retail
All this could pale in comparison to Mukesh's grand plans in the retail sector. Though not much is known about the plans as yet, it could beat the Infocomm rollout in size and reach. If rumours are to be believed, Reliance is planning mega-size retail and entertainment complexes in all major cities. Each of these complexes would involve a staggering Rs500 crore each.

These complexes would be different from the Wal-Mart type hyper market chain which is also being planned by Mukesh. If reports are to be believed, Reliance has already identified 70 locations for the hyper market chain. These two projects combined could become one of the largest and most ambitious ventures the country would see in the near future.

The credentials of Mukesh in executing mega projects are well established. Be it the Patalganga petrochemical complex, the Jamnagar refinery or Reliance Infocomm, Mukesh has taken up massive projects which few, if any, entrepreneurs in India have ever hoped of. More significantly, he succeeded in implementing all these projects in record time at globally competitive capital costs.

Including the proposed foray into retail, Mukesh's ambitions and growth prospects would easily match those of Anil. And unlike Anil, he can finance his growth from internal cash flows without much equity dilution.

However, till the retail business reaches some scale, the stock markets would give Mukesh's businesses a lower rating than those of Anil. True to his style, Anil has wasted no time in announcing his business focus. The markets seem to be happier with the younger brother going by the relative appreciation in the respective stocks of their companies on the first day after the settlement was announced.

also see : CRISIL reaffirms ratings to RIL, Reliance Energy Ltd and IPCL
Reliance — the settlement and way forward

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