Mumbai/New Delhi: The Supreme Court decision on gas pricing could not have been timed any worse for Anil Ambani, who needs to fund a range of ambitious projects estimated to cost about Rs1 trillion in sectors ranging from power to telecom to finance.
Click here to view a slideshow of snapshots from the Ambani album before the brothers drifted apart
That’s one reason why officials belonging to the Reliance-Anil Dhirubhai Ambani Group (R-Adag) swung into damage-control mode on Sunday, concerned by the adverse reaction to the judgement in the markets and the media.
For instance, J.P. Chalasani, CEO of Reliance Power Ltd (RPL), dismissed all talk of Reliance Natural Resources Ltd (RNRL) becoming a casualty of the verdict.
“RNRL has become a much stronger company after this judgement,” Chalasani said in an interview at Reliance Centre, the group’s headquarters at Ballard Estate in downtown Mumbai.
Referring to the other RNRL businesses, such as the four coal-bed methane blocks, a gas exploration block, coal procurement and shipping logistics, Chalasani argued: “The verdict doesn’t change or impact our business model. It will only impact power tariffs.”
The comments come as the analyst community reacts adversely to the judgement and begins to re-rate stock of R-Adag companies. The younger brother’s situation contrasts with that of his brother, analysts say. Mukesh Ambani, chairman and managing director of Reliance Industries Ltd, is in a sweet spot, having completed a capital expenditure cycle, and seeding next-generation businesses.
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“Assuming the (Supreme Court) decision is final and (R-Adag’s) Dadri power plant is not expected to come up, the valuation of Reliance Power would be lower by Rs40 a share,” wrote Shankar K. and Shubhadip Mitra, analysts at Edelweiss Securities Ltd in a note issued immediately after the court order on Friday. “This translates into an impact of Rs170 a share for SOTP (sum of the parts) of Reliance Infrastructure Ltd,” the group’s flagship company.
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Lalit Jalan, chief executive officer of Reliance Infrastructure, countered this in an interview over the phone to Mint. “EPC (engineering, procurement and construction) contracts are given out through competitive bidding by R-Power and we have got some such as Butibori I and II, Sasan I, but lost some such as Rosa I,” Jalan said. “So it was not cut and dried that Dadri EPC would come to us only.”
Analysts have other concerns as well. None of R-Adag’s group companies have “strong cash flows,” said S.P. Tulsiyan, an investment analyst who tracks both groups closely. A strong cash flow from group companies would have eased the burden of funding the projects that are slated to come up for commissioning in the next couple of years. To be sure, Reliance Infrastructure is sitting on Rs9,000 crore of cash and the initial public offering of RPL in early 2008 raised close to Rs11,563 crore. But that may not be enough.
“He (Anil Ambani) will have to come forward and dilute his holding in group companies by raising funds from the equity markets,” said Tulsiyan, who has calculated the funds that need to be raised at Rs32,000 crore.
Going forward, rasing the money from the equity markets will be a challenging proposition, he said. Compounding the group’s woes is the erosion of market capitalization of firms such as RPL, RNRL and Reliance Communications Ltd. “The old days are gone, when capital raising could be accomplished by proposed projects,” the analyst said. Other analysts have calculated that the group needs to mobilize at least Rs35,000 to Rs40,000 crore to fund all its plans. The focus of the group should shift to RPL, which has a total capacity of 35,000MW in its portfolio, though only projects totalling 941MW have been commissioned thus far.
“Apart from an indefinite delay in the Dadri power project whose economics now change for the worse, the group now faces an issue of having to prove its credentials outside the finance and telecom space,” said R. Balakrishnan, a Chennai-based investment adviser. Other challenges relate mostly to project implementation, with the group having bid for a vast range of projects that include power, roads, metro systems and a sea link.
Chalasani defended its record on implementation. The Rosa phase I, Yamuna Nagar and Hissar power projects were completed well before schedule by Reliance Infrastructure, he said.
Jalan and Chalasani said there is enough gas available in India, but analysts say the judgement will have an adverse impact on the group’s plans as the government has to sign off on allocation of the fuel. The court has asked the two firms renegotiate their agreement over the supply of gas. However, the fuel is allotted to customers by the government in keeping with the gas utilization policy that prioritizes users: existing fertilizer units rank first, followed by existing power, petrochemical and city gas projects. New projects aren’t high up on the list.
“If the allocations made by the government thus far are any indication, a large quantum of gas now getting allocated to new power plant seems difficult, unless large new gas (finds) come up for commercialization in the near future,” said Deepak Mahurkar, associate director, oil and gas industry practice, at PricewaterhouseCoopers.
While RNRL wants 28 million standard cu. m of gas a day (mscmd) for 17 years, RIL is currently producing 62 mscmd of gas in its D6 block in the Krishna-Godavari (KG) basin off India’s east coast. The allocation commitment has already been made for 80 mscmd of gas.
“RPL’s primary concern should be to secure long-term supply and to get the quantum right,” said a New Delhi-based power sector expert who did not want to be identified due to commercial considerations. “They would not be able to do it if they are lower down in the pecking order. There will be an impact on fund-raising as no one will put money (up) for gas-based capacity as everyone will wait for things to settle down and for clarity to emerge,” he said.
In telecom, the group will need to pay for any third-generation mobile phone licences that it wins in the ongoing auction.
Tulsiyan said one of the options would be to divest telecom, and stay focused on power, a move that will solve the group’s need for cash to fund projects.
Ruling Supreme Graphic by Naveen Kumar Saini/Mint and What Investors Say Graphic by Yogesh Kumar/Mint
Anushree Chandran and Shauvik Ghosh contributed to this story.