Global Outlook

Reliance Industries Ltd is set to drive its future business growth

Contributed by Nirmal Bang

By Nirmal Bang

Since its 36th Annual General Meeting (AGM) held on 18th June this year, Mukesh Ambani, the Chairman and Managing Director of Reliance Industries Ltd or RIL, has unveiled a number of business plans that could well be touted as larger than any of the world’s biggest non-government expenditure plans. In his annual speech, Mukesh Ambani shared his ambitious business plans with his shareholders. He said, “It took three decades for Reliance to create an enterprise value of over $80 billion. I feel hopeful and confident that Reliance can accomplish value creation of a similar magnitude in less than a decade.”

One can get a crude sense of the humungous size of business operations of the Reliance empire even if he simply looks at the revenues that it generates for the exchequer in the form of taxes and duties which stood at Rs 17,972 crore during the year.

The company had cash and cash equivalent of Rs 21,874 crore as on year-ending March ’10. According to estimates by investment bank Goldman Sachs, RIL is expected to generate free cash flows of $18 billion between fiscal year 2011 and 2014.

The company, which plans to double its enterprise value in the next 10 years under the leadership of its patriarch, has set high values and standards to pursue such growth targets by venturing into various new sectors. Likewise, many companies have announced fashionable plans to get immediate media exposure. However, when it comes to ground work and the actual launch of their growth plans, such companies fade into oblivion for more than one reason.

So, what sets RIL’s plans apart? How is it logically possible to grow a business from $80 billion to $160 billion in size in a short span of 10 years? The figures are mind-boggling even for giant international organizations involved in executing mega projects.

Over here, two key events relating to the company’s prospects that preceded the plans unveiled at the AGM of Reliance Industries need to be mentioned. The first being Supreme Court’s ruling on 7th May pertaining to the dispute between RIL and Anil Ambani-led RNRL over the gas supply agreement. The SC turned down RNRL’s claim to the 28 million units a day of natural gas from the Krishna-Godavari basin at a cheaper rate of $2.34 mmBtu of gas for its upcoming gas-based capacity of 8500 mw.

In its landmark judgment, the Apex court arrived at a decision in total contrast of the Bombay High Court ruling, which favoured RNRL. The Supreme Court said the government was the legal owner of the gas and that it had the right to decide the price and utilization of the fuel, which is a natural asset.

The Supreme Court also said that RIL was bound by the Production Sharing Contract (PSC) to sell the natural gas from the KG basin at a price approved by the government and that the PSC will override all other private agreements or Memorandum of Understanding (MoU) signed between the Ambani brothers.

The details about the family agreement, the MoU signed by the Ambani brothers before the demerger of the Reliance Group in 2006, has never been placed in the public domain. It needs to be mentioned here how the court ruling forced the estranged brothers to come on to the discussion table with open minds.

During reconciliatory discussions, the Ambani brothers agreed on many key issues holding positive ramifications for both the group companies and their shareholders. The Mukesh Ambani-run Reliance Industries agreed to commence the supply of gas to ADAG as soon as its power plants became operational and has received government approvals for gas allocation.

What followed is unimaginably big. The most significant step that Anil Ambani initiated in the favour of companies run by his elder brother was annulling all the existing non-compete agreement clauses that both the groups had entered into in January ’06.

However, it did restrain RIL from setting up gas-based power plants until 2022. Thus, the scrapping of the non-compete agreement was the key to the AGM plans announced by Reliance Industries.

An identical statement released by both the groups said that the renewed harmonious relationship “will provide enhanced operational and financial flexibility to both groups and greater ability to participate in high growth sectors of the Indian economy such as oil and gas, petrochemicals, telecommunications, power as well as financial services.”

The announcements related to the new business opportunities for RIL following a patch-up between both the brothers made people all over the world sit and take note of the potential of India’s largest private listed company.

ORGANIC EXPANSION IN THE CORE PETROCHEM SEGMENT

The core business of RIL continues to be in the field of polyester and petrochemical operations even as it plans to foray into diverse sectors. Chairman Mukesh Ambani at the recent AGM had announced a major organic expansion plan for this division over the next five years.

The company’s investment in the new polyester and petrochemical manufacturing facilities is expected to touch a whooping $9 billion, which could easily be its single largest capacity addition in polyester, underscoring the prospective strength of its textile and fibre division in the years to come.

On its petrochemicals division, specifically, Mukesh Ambani had said: “We are committed to creating competitive capacity in petrochemicals to cater to the next decade of growth in India and Asia.”

The group honcho is also positive about the sector right now as the capacity addition remains low, post global recession, which would further provide the group an opportunity to build a huge capacity at competitive capital costs. The company is creating a 1.4 million tonne paraxylene capacity at Jamnagar and will also build one of the largest coke gasification facilities in the world.

COMMITMENT TO THE SYNTHETIC RUBBER INDUSTRY

A month prior to the AGM, the company had announced a joint venture (JV) with Russia-based Sibur, a leading petrochemical firm, to produce synthetic rubber at the company’s Jamnagar site in Gujarat. India is a net importer of rubber.

The JV will provide RIL a unique opportunity to tap the ready to absorb market based on the growing demand for increased volumes of tyre production in the automobile industry in India and the sub-continent. The inclusion of butyl rubber through this JV completes a comprehensive portfolio in the synthetic rubber domain for RIL.

According to the MoU signed between both the firms, Sibur will provide the proprietary technology for butyl rubber polymerisation and its finishing, while RIL will be involved in supplying monomers and providing the venture with infrastructure and utilities.

Though investment figures are not known, when RIL announces certain plans for an industry, backed by its unmatched superior technical and project execution skills, investors can be rest assured that these plants will be of world-class standard comparable to the biggest of their kind anywhere in the world.

LEAPING AHEAD TO FOURTH GENERATION TECHNOLOGY

From all its new business plans, probably the most widely reported of them all remains RIL’s re-entry into the telecom industry following the demerger. Older brother Mukesh Ambani’s love for telecommunication business is no secret to the world since he was involved in the creation of Reliance Infocomm (now Reliance Communications under ADAG), even before the business went to younger sibling Anil Ambani as part of the family agreement.

In a dramatic sequel of events on the final day of the Broadband Wireless Access (BWA) auctioning process, RIL made public its $5 billion plan to foray into the telecom industry.

The break-up of telecom spending plans of RIL can be shown thus: (a) It bought 95% of Nahata group’s Infotel Broadband Services for $1 billion, (b) It agreed to pay $2.75 billion as license fees for the BWA airwaves and (c) It will invest an additional $1 billion in telecom infrastructure while aiming for 100 million subscribers within five years of the launch of its services. RIL has also initiated a process to raise Rs 1,000 crore by commercial paper to kick-start its telecom entry.

It needs to be mentioned here that Infotel Broadband is the only company that has won pan-India licenses for the 20 MHz broadband spectrum. Interestingly, the company has no assets other than the spectrum license, which it has bid for. In this asset light and partnership-heavy approach, RIL intends to create end-to-end solutions in the entire data value chain by forging collaborations with strategic partners in the telecom industry.

While announcing Infotel Broadband acquisition deal, RIL Chief Mukesh Ambani said, “We see this as a next wave of value creation opportunity in the wireless broadband space. We believe this will pole-vault India’s economy into the digital world at an accelerated pace while creating next generation tools that will not only enhance productivity but also create world-class consumer experiences.” More so, Reliance has also indicated that it would use the unproven long-term evolution (LTE) technology for wireless broadband services rather than WiMax.

EMPOWERING ULTRA-BIG DREAMS

Even as the dust settles down on the news of RIL’s entry into the telecom sector, the company further powers its way by announcing its foray into power plants. RIL plans to enter into power production marked by its participation in bidding of ultra mega power projects (UMPP) to create a big-scale power generation capacity.

RIL cannot venture into gas-fired power plants as per the new agreement between the Ambani brothers. However, the company intends to foray into coal-based power generation projects, hydropower projects and nuclear power when the sector opens up for private companies. The company also has presence in solar energy and other renewable energy sources.

As per the latest government directive, each company can win bids for a maximum of three UMPPs. Considering RIL’s ability to carry out green field projects successfully, even at conservative projections, they should garner at least 3 UMPPs, in addition to smaller units. At the conservative cost estimates of Rs 6-8 crore per MW of installed capacity, the investment requirements for 3 UMPPs that is, 12,000 MW could be astounding at around Rs 72,000 crore to Rs 96,000 crore. RIL already has some experience in operating power plants. RIL operates 1,000 MW of captive power plants to cater to its refineries in Jamnagar. Thus, RIL may not find it too alien to venture into the energy space.

MODERN RETAILING AT ITS BEST

At a time when a number of global multi-brand retailers such as Walmart and Carrefour are awaiting the opening up of the organized retail sector in India to foreign companies, RIL seems to be doing everything correctly by targeting the modern retail sector of India. The industry structure in India, which is dominated by small mom-and-pop shops, constitutes a majority of nearly 94% of the retailing sector even today.

In its AGM, RIL has announced its plans to expand its retail business 10-fold in 5 years. Its present retail business is nearly $1 billion in size. Mukesh Ambani had stated that he expects the company to clock a revenue of Rs 45,000 crore from its retail venture over the next five years from Rs 4,500 crore during 2009-10. The Business Monitor International India Retail Report for Q3-2010 forecasts the total retail industry to grow to $543.2 billion by 2014 from $353 billion in 2010.

At the moment, Reliance Retail business has 1,150 stores in 86 cities across 14 states with 5.5 million membership customers. RIL plans to be in 1,500 cities and towns by 2015 with an investment of Rs 25,000 crore, which is about $5.5 billion. The firm has also hired professionals for key functions such as operations, supply chain, HR and even some top management executives from wellknown retail chains like Tesco Lotus from Thailand to professionalize its operations.

The company operates its retail division under various value formats including major ones like Fresh (food items akin to kirana stores), Super (supermarkets), Trends (apparel) and Digital (consumer durables) and Mart (hypermarkets) among others.

SHELLING OUT FOR THE NEW ENERGY SOURCE

Apart from testing new waters in the form of 4G technology, RIL is betting big on yet another untested territory in the form of the US shale gas sector, which is sort of a new energy source.

After entering into a JV with Atlas Energy - which has shale gas fields on the border of Pennsylvania, West Virginia and New York in April ’10 for a 40% interest in the Marcellus shale formation for $1.7 billion, RIL has yet again signed a JV with Pioneer Natural Resources by picking up a 45% stake for $1.35 billion in the US company’s shale natural gas assets.

Shale gas, one of the unconventional sources of natural gas with low permeability, is found below the surface between two rock formations where shale acts as a source of natural gas. Shale gas has been produced for years from shales with natural fractures, but its commercial feasibility has come to the fore with the recent advances in technology facilitating horizontal drilling.

Gas supplies from each of these two buyout targets could be as big a discovery as that of the gas in the KG basinitself. With gas availability in energy-hungry US, the shale gas sector entry could well guarantee success for the company.

FERTILIZER: FOOD FOR THOUGHT

RIL is reportedly evaluating entry into the fertilizer sector with investments of $3 billion over the next five years. One of the by-products, petroleum coke, produced during the process of crude refining is to be utilized to gasify to feed its power plant as well as feedstock for ammonia/ urea production.

With the internal feed stock, RIL plans to set up a 10,000 metric tonne urea plant at a cost of $3 billion. India imports over 5 million tonne of urea per annum and theimports are gradually growing. Also note that no new urea plants were set up in India in the last 12 years. When completed it will be India’s largest green field fertilizer capacity in India, retaining India as the third largest fertilizer producer in the world.

Another minor entry is its tie-up with Deccan 360, the brand owned by Deccan Cargo and Express Logistics Pvt Ltd in the logistics sector. This tie up will help Reliance Retail division in warehousing and managing logistical solutions. Both the companies will jointly work towards deriving synergies in IT automation, project management and retail network. Deccan 360 is involved in the business of cargo airline, handling small parcels and documents through a surface transport network.

Some more unconfirmed news flying around RIL’s counter is its interest in acquiring 26% stake in hospital chain Fortis Healthcare for entering into the health care sector and 26% stake in Pipavav shipyard to enter into the ship-building sector.

Not to mention RIL’s keen interest in the financial services sector, including private equity and mutual funds. Media reports point out that Mukesh Ambani isclose to signing a JV with US private equity and hedge fund giant DE Shaw.

It needs to be stressed here that with so many diverse business plans spanning across several different industries, comes the risks associated with ambitious investment plans for the same. Some of the new sectors that the company plans to foray into come wrapped with complimentary risk tags linked with expansion in highly competitive markets such as telecom.

Some telecom analysts are of the view that RIL’s commercial deployment of wireless data services using LTE may face affordability challenges in the pricesensitive Indian market.

The 10-fold growth aimed in the retail sector by the company is fraught with political play and high level of resistance from small kirana stores. The growth in the renewable energy space, such as solar power and shale gas is still in its nascent stage.

At the same time, the power sector is highly capitalintensive, yet a relatively stable business with no run away earning prospects. When we look at individual plans of RIL for various industries, one can be sure that RIL has everything going for it.