Mumbai: The resolution of a bitter legal battle, overseas acquisitions, new partnerships, the end of a limiting anti-compete treaty between warring brothers—the year ended 31 March was an action-packed one for Reliance Industries Ltd (RIL) and Reliance Group. Analysts who have tracked both for years insist that the activity has been most intense since the Reliance empire was carved up between the brothers in 2005.
The new fiscal year (2011-12), which has just begun, presents new challenges to Mukesh Ambani’s RIL and younger brother Anil Ambani’s Reliance Group.
For RIL, it is imperative that the company finds a way to improve gas production from its D6 block in the Krishna-Godavari (KG) basin, which is way below the targeted production by now. Reliance Group, meanwhile, has to address several issues pertaining to Reliance Communications Ltd (R-Com), the group’s flagship company: reducing debt, operating in a fiercely competitive market, and, not the least, coping with regulatory scrutiny. The company’s role in the so-called 2G scam, where air waves were given to some telcos on seemingly favourable terms, is being investigated by several agencies.
Ahmed Raza Khan/Mint
The gas verdict
The year began with a major setback for Reliance Group as the Supreme Court passed a verdict on 7 May upholding the price of $4.2 per million British thermal unit (mBtu) for gas from the KG basin, fixed by the government.
Reliance Natural Resources Ltd (RNRL), a Reliance Group company, was to pay a lower price of $2.34 per mBtu for this gas in keeping with a family settlement.
Reliance Power Ltd (R-Power), the group’s power generation arm, was to use this for gas-based power plants it planned to build.
With the apex court upholding gas as a national asset and striking down the family accord, RNRL had outlived its purpose and was merged with R-Power in September.
R-Power had raised at least Rs 11,000 crore through an initial public offering in 2008. A sizeable portion of this money was to fund a portfolio of around 7,000 megawatts (MW) of gas-based power.
R-Power has applied to an empowered group of ministers (eGoM) at the Centre for gas allocation at Samalkot in Andhra Pradesh, where a 2,400MW gas-based power plant is planned.
The company’s request for gas is still pending with the eGoM, and with gas production from RIL’s KG-D6 hardly being what it was supposed to be, the probability of any incremental gas allocation in the near-term remains unclear.
Declining gas production
The future of R-Power’s gas-based power generation plans has always been intrinsically linked with that of RIL’s ability to pump more gas out of its D6 block, and the latter looks suspect at the moment.
The oil-to-yarn and retail conglomerate produces around 52 million standard cubic metre per day (mscmd) of gas from KG-D6 currently, but going by the original plan, the production should have reached 60 mscmd by now.
In March, RIL intimated the Directorate General of Hydrocarbons (DGH) that gas production from the field could slump further to around 47 mscmd, “unless radical changes were implemented at the block”.
A 3 March research report by analysts Vinay Jaising and Rakesh Sethia of Morgan Stanley states that RIL has made an 8-10% cut in gas supplies to power and fertilizer companies that were to receive this gas. The profitability of some of these consumers could be adversely affected, the report said.
“Raising gas production from KG-D6 would be a matter of serious concern for RIL in this fiscal. If it is unable to improve production, it could eat into potentially higher incremental revenue from its petrochemical and refining businesses,” said S.P. Tulsian, a Mumbai-based independent stock market analyst.
One of the counter-measures RIL would bank on is technical expertise to help overcome declining production from BP Plc, the London-based energy company.
According to a deal announced in February, BP will pick up a 30% stake in 23 oil and gas blocks operated by RIL for $7.2 billion. Mukesh Ambani had said that he expected the deal to be consummated by March 2012.
Fostering international tie-ups has been the preferred route to either overcoming hurdles or exploring new business avenues for both the brothers.
Tulsian, who has been tracking the undivided group since 1977 when RIL went public, said 2010-11 had the highest level of cross-border activities he has seen for both.
Apart from the BP deal, RIL has also ventured abroad to pick up shale gas assets worth around $3.44 billion in the US.
At a personal level, Mukesh Ambani was appointed a director on the board of Bank of America Corp. last month.
Reliance Group has been relying on cross-border tie-ups mostly to raise funds for its businesses, and strengthen its presence in areas such as media and financial services.
In December, R-Power secured a Rs 5,000 crore loan facility from a consortium of Chinese banks. The financing was for R-Power’s 3,960MW ultra mega power project coming up at Sasan in Madhya Pradesh, and was to support the import of power equipment for the project from China.
In the last financial year, the company also signed an agreement with the US Exim Bank under which R-Power could get loans up to $5 billion for its various projects over the next three years.
The company is procuring equipment for some of its power projects from US-based General Electric Co.
R-Com signed the final agreement for a $1.93 billion loan facility from the Chinese Development Bank in March to refinance high-cost rupee loans raised to secure the 3G spectrum.
Reliance Broadcast Network Ltd (RBNL), the media services arm of the Anil Ambani-led group, entered into joint ventures with US-based CBS Studios International and Luxembourg-based RTL Group SA to launch entertainment channels in India.
While most of Reliance Group’s international tie-ups have been to raise funds to sustain expansion plans, RIL is looking to deploy the huge cash on its balance sheet, said Arun Kejriwal, director of Kejriwal Research and Investment Services.
“Such international tie-ups would become more widespread and deeper,” said Prakash Diwan, head of institutional broking at Networth Stock Broking Ltd. “RIL, especially, has been scouting for overseas opportunities as there isn’t much more they can do in the Indian market.”
The biggest deal announced by Reliance Group came in the financial services space where Japanese life insurer Nippon Life Insurance Co. agreed to take a 26% stake in Reliance Capital Ltd’s (R-Cap’s) life insurance business on 14 March.
Close on the heels of this deal, RIL also announced on 27 March a partnership with New York-based D.E. Shaw Group to launch financial services in India. This is significant as India’s banking regulator may allow large industrial houses to set up banks. Until now, business houses such as Reliance have not been allowed to get into the banking space, but that may change and guidelines on new bank licensing norms are expected shortly.
RIL’s entry into the financial services business was facilitated by the termination of a non-compete pact that the two brothers signed June 2005. On 23 May, the two declared that they had mutually agreed to terminate the pact. This paved the way for RIL to enter businesses that were out of bounds for it due to Reliance Group’s presence in them.
According to an HSBC Securities estimate, RIL may have around $22 billion in cash and cash equivalents by the end of the current fiscal, including payments from BP and an estimated cash profit of $8 billion. Analysts have said that RIL will might look at further acquisitions to deploy this cash favourably.
For RIL, the focus will be on finding ways to improve gas production from D6 and incubating the new businesses it has entered, such as telecom and shale gas exploration.
India’s largest company by market value is expected to roll out its broadband wireless services this fiscal. In June last year it acquired Infotel Broadband Services Pvt. Ltd, the only company to win pan-India spectrum at a government auction, for Rs 4,800 crore.
One of the biggest challenges before Anil Ambani and his executives this year will be to reduce debt on R-Com’s balance sheet and emerge unscathed from the 2G controversy. R-Com, India’s second largest mobile telephony firm by subscriber base, had a net debt of Rs 32,447 crore in December.
It had tried hiving off its telecom tower business to GTL Infrastructure Ltd last fiscal year but the deal fell through at the last moment. The move would have allowed R-Com to then look for a strategic investor at the parent company level at a better valuation. Both conditions are yet to be met and R-Com is still scouting for a suitor for its tower business.
Meanwhile, the Central Bureau of Investigation (CBI) filed its first chargesheet over the alleged wrongdoing in the allotment of 2G licences and air waves. Reliance Telecom, a unit of Reliance Group, was named as one of the entities responsible for the conspiracy, CBI told a special court on Saturday, and named three Reliance Group executives in its filing.
In a statement issued to the bourses on Monday, a Reliance Telecom spokesperson said the charges against the company and the named executives were preliminary.
“As legally advised, the persons so named deny all charges, and will defend themselves in the appropriate legal proceedings,” the spokesperson said. “These preliminary charges have no impact on the business, operations and/or licences of Reliance Telecom, and even more so, are not connected in any manner to any other of our listed group companies.”
According to Diwan of Networth Stock Broking, while the law will take its own course, the events that are unfolding may raise issues of corporate governance at Reliance Group.
Kejriwal observes that issues such as the 2G scam and a case of alleged routing of overseas money into the Indian stock exchanges against Reliance Infrastructure, which was settled by the markets regulator, the Securities and Exchange Board of India, by a consent order has diverted a lot of the management bandwidth at the group away from the core business.
RIL’s growth plans in telecom and R-Com’s needs make for a strategic fit, but it is unclear if the companies and the brothers will work together again.
Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May front-page story in Mint that it disputed. HT Media is contesting the case.