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Business News/ Companies / Turning around new ventures real challenge for Mukesh Ambani
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Turning around new ventures real challenge for Mukesh Ambani

Analysts say he has given a new dimension and direction to the company, but the path ahead is tricky

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Mumbai: Adecade after he took over as chairman of Reliance Industries Ltd (RIL), India’s richest man Mukesh Ambani has grown the refining and petrochemicals businesses he inherited, but his ambitious plans for the new businesses he embarked upon—oil and gas exploration, retail, and telecom—are yet to succeed, although, to be fair, all are so-called long-gestation businesses.

And at every stage, he has been compared with his father.

Ambani took over as chairman of RIL on 31 July 2002, after the death of his father and the company’s founder, the legendary Dhirubhai Ambani earlier the same month.

photoIn the years since, Mukesh Ambani and his younger brother Anil have had an all-too-public falling out over their inheritance resulting in a split in the Reliance empire, and another fight over the supply of gas by RIL to Anil Ambani’s Reliance Natural Resources Ltd before settling both. What must worry the elder Ambani though are RIL’s inability to get its way with the incumbents at the petroleum ministry and the growing disenchantment of investors with the company’s stock that has lost 11.89% in the past year although it has risen 626.85% in the decade in question (BSE’s benchmark Sensex has lost 5.79% in the past year and risen 473.19% in the decade). RIL shares rose 1.23% on Monday to close at 729.25 on BSE Ltd while the benchmark 30-share Sensex rose 1.81% to close at 17,143.68.

Since 18 May 2009, when it touched an all-time high of 3.71 trillion, the company’s market value has fallen 36%.

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It’s now a decade since Mukesh Ambani took over as chairman of Reliance Industries. How successful has he been and how does he stack up against his father? Mint’s Aveek Datta tells us.

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Mukesh Ambani declined to be interviewed for this story.

The latter half of the decade has seen significant pressure on RIL’s profitability. Between 2007-08 and 2011-12, the growth in its net profit has been a mere 3% over that period.

And even this growth has come largely from non-operating income arising from the tremendous amount of cash the company has at its disposal.

“Barring other income, net profit growth may even have been negative. RIL’s businesses have gone through volatility due to macroeconomic conditions, and businesses in other parts of the globe have become more competitive," said Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd, who has followed RIL’s growth closely.

Still, Ambani has done well in the decade.

“During his tenure, RIL has definitely grown in size and scale. There is no doubt about it," Kejriwal said. “He has given a new dimension and direction to the company."

photoThe path ahead, though, is tricky, said another analyst.

“There is a lot of confusion surrounding the company with respect to its future plans," said S.P. Tulsian, a stock analyst and long-time RIL tracker. “Its plans in retail, telecom and exploration and production are yet to bear fruit and nothing has really taken off in some of the areas in which it was betting big earlier like power and special economic zones."

Interestingly, in 2002, petrochemicals accounted for 40.7% of Reliance’s revenue and 44.2% of its profit; refining, 57% and 42.5%, respectively. In 2011-12, the corresponding proportions were 75.67% and 48% for refining and 20.7% and 45% for petrochemicals.

“In my thoughts and actions, my father will always be present and I will be measuring my actions by the yardstick of his expectations," Ambani said while taking over as chairman in 2002. “He (Dhirubhai) built Reliance from scratch to India’s first private sector Fortune Global 500 company. Our task is to strengthen that position, to transform it and to ensure its growth in keeping with his dreams."

He seems to have done that.

Scaling up

Between 2002-03 and 2011-12, RIL’s revenue has grown almost sevenfold to 3.4 trillion; net profit, fivefold to 20,040 crore. The company’s market capitalization in the same period has grown six times to 2.44 trillion.

photoAmbani’s biggest achievement is undoubtedly the capacity expansion at the company’s refinery in Jamnagar, Gujarat. The Jamnagar refining complex is the largest and one of the most complex of its kind in the world with the capacity to refine 1.24 million barrels of crude oil per day. It has traditionally enjoyed better refining margins than its peers simply because it can use poor quality (and less expensive) crude to distill the same quality and quantity of output.

Also See | Key Numbers (PDF)

That kind of performance made the company’s refining business and, to a lesser extent, the petrochemicals business, an efficient cash generation machine for much of the decade.

As on 31 March 2012, RIL had cash and cash equivalents of 70,252 crore.

However, for the past three quarters, the company’s petrochemicals and refining businesses have floundered. Slowing economies in China and Europe are affecting the demand for petroleum products and petrochemicals. New refining capacities coming online in other regions, and shrinking margins for petrochemical products across the world are some of the reasons for these businesses underperforming. The year-on-year operating profit from the refining businesses fell 32.8% in the June quarter, 32.4% in March quarter, and 30.8% in the December quarter. The year-on-year operating profit from the petrochemicals business fell 20.7%, 17.2% and 11.2% over the last three quarters.

Much of RIL’s early success under Dhirubhai Ambani was based on the strategy of integrating the petrochemicals business backward (into the raw materials). Mukesh Ambani followed a similar strategy in the refining business in the 2000s and increased his company’s focus on and investments in the exploration business that it had entered in 1999, when his father was alive. Indeed, he even ventured into the relatively new business of shale gas and acquired interests in three shale gas blocks in the US between April and August 2010, investing a total of $3.44 billion.

Ironically, though, it was this focus that has worked to the company’s disadvantage in the past year and a half when falling gas production from the block it won in 1999, KG-D6, didn’t just hurt RIL’s financials but also put it in a spot with regulators.

Gas trouble

RIL, which has traditionally executed and enjoyed the returns of big-ticket projects on its own, offloaded a 30% stake across its entire oil and gas portfolio to London-based BP Plc. for $7.2 billion in August. RIL hardly needed the cash, but BP has deepwater drilling expertise that may come in handy at D6.

Meanwhile, S. Jaipal Reddy replaced Murli Deora as India’s oil minister, and suddenly, RIL couldn’t seem to get anything to go its way. There was an allegation, prompted by an audit by the government’s auditor, that the company gold-plated costs while developing the D6 field; an ongoing arbitration effort seeking to limit the development costs the company could recover; flak over declining gas output; and disagreements over the prices the company could charge for D6 and coal bed methane gas.

An analyst and a former executive at RIL said Ambani should focus on mending bridges with the government because it is costing the company dearly.

photoKejriwal said that RIL’s confrontationist attitude toward the government is a change from Dhirubhai Ambani’s time. A former RIL executive who did not want to be identified stated that Dhirubhai could “manage the policy environment better". Indeed, apart from run-ins with former prime minister V.P. Singh in the late 1980s, when he was finance minister, RIL under Dhirubhai Ambani seems to have negotiated the policy regime easily.

Earlier in the past decade, Ambani fought a bruising legal battle with brother Anil over the supply of gas from KG-D6 to the latter’s power company as envisaged in an agreement signed between the two in 2005 when they split the Reliance empire between themselves after another fight that was largely fought in the media. The case ended with India’s top court ruling in favour of RIL, although it effectively took away the company’s powers to sell the gas to customers and at a price of its choice (the government decides both now).

Despite all the problems at D6, Tulsian and an executive at RIL who did not want to be identified, believe that bringing the D6 reservoir under production has been one of Ambani’s biggest achievements. “There may be a lot of talk about the performance of the field at present, but to go to such deep waters and produce oil and gas on this scale for the first time in the country is definitely something that needs to be seen as a feat," the RIL executive said.

RIL’s profitability and investor confidence now hinge on the gas production issue getting resolved, Kejriwal added.

Unfortunately for RIL, that isn’t the only business where it faces trouble.

Headwinds in retail

Ambani has always believed that consumer-oriented businesses such as modern retail and telecommunications are the ideal foil for the company’s more industrial businesses such as petrochemicals, refining, and exploration.

RIL commenced its retail operations in 2007 with the launch of convenience stores branded Reliance Fresh. The new business ran into rough weather almost immediately with political opposition in some states to the entry of a large conglomerate into a business largely dominated by local grocers.

In the five years since, RIL has managed to all but overcome political opposition and has opened supermarkets, electronic goods stores, even bookstores across India but the business is yet to turn profitable. Kejriwal said the company may have tried to do too much. “It should have streamlined the number of retail formats it wanted to be in and brought them into profitability, rather than trying for too many things at once."

photoThe economic downturn of 2008 and intense competition from other companies hasn’t helped. In 2011-12, the combined loss of the firm’s 34 largest retail entities was 434 crore, around 12% lower year-on-year. Meanwhile, RIL’s food and grocery and hypermarket business has seen three management changes in six years.

Also See | Milestones In The Decades (PDF)

“The management of the retail business and the model to be followed has changed far too frequently over the years. Once or twice is understandable," said a former RIL executive who has worked with both Dhirubhal Ambani and Mukesh Ambani. He did not want to be identified.

Yet, Ambani’s faith in the prospects of the retail business is unflinching. At RIL’s annual shareholders’ meet in June, Ambani said that RIL was targeting a growth of five to six times in revenue from retail and would do business worth 40,000-50,000 crore over the next three to four years.

“There is still no visibility on profits from the retail business," Tulsian said. “Targets for achieving profitability have been getting postponed and one five year-plan is getting replaced with another. The company needs to peg a firm timeline for achieving profits from this business and let investors know."

Turning around the retail business will be one of the biggest challenges for RIL, Tulsian added.

A second RIL executive who didn’t want to be identified defended the company’s progress in retail and said Ambani had always maintained that this was a business for the “long haul". This person admitted that the stakes were high. “Ultimately, the performance of the retail business is something by which he (Ambani) will be remembered by."

Another business with which Ambani is strongly associated is telecom.

4G next

Ambani spearheaded RIL’s entry into telecommmunications in the early 2000s before the business went to his brother during the family settlement.

In May 2010, the brothers ended a non-compete agreement they had signed at the time of the settlement in 2005.

A month later, in June 2010, the company announced its re-entry into telecom by acquiring Infotel Broadband Services Pvt. Ltd, a privately held telecom company that won broadband wireless spectrum across India in a government auction. Even after more than two years of securing the spectrum through the acquisition, RIL is yet to roll out fourth-generation (4G) wireless services.

While the company has been internally firming up plans for the services to be offered once the rollout happens, one of its executives attributed the delay to a shift in strategy as far as building the backend infrastructure for the venture was concerned, in the wake of the larger changes in India’s telecom space.

This person, a third RIL official who spoke on condition of anonymity on the sidelines of the company’s last annual general meeting, said though RIL had initially wanted to either acquire or lease telecom towers and optical fibre cable from existing companies, unreasonable valuations for such assets have compelled it build them on its own. Though a time-consuming exercise, the move is expected to make RIL’s offerings cost competitive.

“I don’t think it’s really their fault," said Kejriwal. “The delay is largely due to the uncertainties in the telecom sector. RIL may have consciously slowed down to buy time till clarity emerges over issues such as telecom licensing and future policy so that there is no ambiguity once the rollout happens."

At RIL’s last AGM, Ambani—usually a picture of calm—lost his cool at some of the criticism aimed at him and his firm that ranged from regulatory scrutiny to falling gas production, to the use of surplus cash. An emotional Ambani said that he was only sticking to Dhirubhai’s vision of building businesses for the future. His second decade in the chair will show how well he manages to do that.

aveek.d@livemint.com

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Published: 31 Jul 2012, 12:47 PM IST
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