Mumbai: Mukesh Ambani on Friday outlined the contours of what could be the next growth phase for Reliance Industries Ltd (RIL), India’s largest private sector company.
In the course of his speech to shareholders at the company’s annual general meeting, the RIL chairman spoke of doubling the firm’s enterprise value (EV)—or market capitalization plus net debt—to $160 billion (Rs7.4 trillion) in less than 10 years.
Also See Game Plan (Graphic)
“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,” said Ambani, dressed in his quintessential black suit and white shirt with a red tie.
The ambitious business plan comes with risks since RIL wants to expand in areas such as telecom and retail, where it will face strong competition. It also plans to seed new initiatives in fourth-generation (4G) telephony, solar power and shale gas, where technologies are still untried. The telecom and retail initiatives also give a strong consumer services flavour to a group that has been dominated by manufacturing prowess.
“I think it is optimistic to think at the moment that RIL can achieve in a decade what they did in three. The new businesses they are entering such as retail and power are already very competitive, and revenues and margins have to be observed for at least two-three years before we can come to any conclusion,” cautioned Asish Bhattacharyya, a professor at the Indian Institute of Management, Kolkata.
The vision statement has laid out an ambitious investment plan (see graphic) that stretches across several sectors and over three strategic horizons. The most immediate strategic move by RIL will be to build on its current strengths in plastics and petrochemicals through capacity expansions. Further out is the diversification into newer opportunities such as power generation and distribution as well as a reiteration of commitment to the struggling retail business. And then there are the more long-term bets in untested areas such as 4G telecom services, development of shale gas assets and solar power.
Ambani has said in various statements over the past year about how RIL is preparing for its next “value creation cycle”. RIL has compeleted yet another capex cycle and is expected to generate free cash flow of $18 billion between fiscal year 2011 and 2014, according to the estimates by investment bank Goldman Sachs.
RIL has usually finalized large investment plans at the end of each capex cycle, a process that saw it move from its origins in textiles to sequential moves into petrochemicals, oil refining, telecom, organized retail and natural gas.
Ambani went into the shareholders’ meeting against the background of heightened expectations and drama, after the cessation of hostilities with younger brother Anil Ambani.
The scrapping of a non-compete agreement between the two brothers last month has created room for Mukesh Ambani to invest in sectors such as power, telecom and finance that were earlier reserved for Anil Ambani. The RIL chairman said in his speech that he looked forward to “a harmonious and constructive” relationship with the business group controlled by his brother, though he did not mention him by name.
The entry into power and telecom are the clearest indications that the elder brother is moving into territory that a family agreement had reserved for the younger brother.
The man who had initially taken the undivided Reliance group into telecom reiterated his old belief that high-quality telecom services could “provide us with whole new ways to run our homes, communities, enterprises and our economy”. RIL recently bought 95% of Infotel Broadband Services Pvt. Ltd, the only company with nationwide rights to offer wireless broadband services.
Ambani described the ambitious entry into power generation, transmission and distribution as a “transformational initiative”.
“The power sector is a logical extension for us and we will bid for all the UMPPs (ultra mega power projects). In the next few months, we will have a concrete investment programme,” Ambani said, while responding to shareholders’ queries.
Earlier in his speech he had mentioned that in addition to solar power, RIL would also enter nuclear power when the government allows it to.
Another pillar for RIL’s future growth would be its retail businesses, according to Ambani. Though Reliance Retail Ltd is still posting losses, Ambani said that his aim was to grow the company’s turnover 10-fold in the next five years, to Rs45,000 crore.
“The market competition in the new verticals Mukesh Ambani is planning to enter has increased over time, especially in telecom where it was present almost a decade back. Having said that, RIL has the financial muscle and human resource to see it through,” said Arvind Mahajan, head of business performance services at audit and consulting firm KPMG.
“The Street was expecting the RIL chairman to elaborate how Anil Ambani and he would collaborate following the scrapping of the non-compete. But he focused on highlighting his own business plans, much of which was already known,” said Kishore Ostwal, chairman and managing director of investment research firm, CNI Research (India) Ltd.
RIL shares declined 1.5% to end at Rs1,055.25 on the Bombay Stock Exchange, even as the benchmark Sensex index lost 0.26% to end at 17,570.82 points. Shares of the firms controlled by Anil Ambani also fell more than the overall market.