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FILE PHOTO: A bird flies past a Reliance Industries sign in Ahmedabad, India, (REUTERS)
FILE PHOTO: A bird flies past a Reliance Industries sign in Ahmedabad, India, (REUTERS)

Reliance’s sketchy record of delivering returns to partners

Reliance has raised big capital from 13 entities. It now has to deliver returns to them, something it hasn’t done too well for partners in the past.

The Money Culture, Michael Lewis’s 1991 book on Wall Street excesses of the 1980s, brought to the mainstream a wordplay on ‘OPM’: other people’s money. It derided the practice of large corporations using the money of other companies and investors to make leveraged buyouts. Continents away, an Indian company was being lauded for imbibing OPM in its original form: operating profit margin. Reliance Industries Limited (RIL), as it was created and kept by founder Dhirubhai Ambani, aimed to implement projects on scale and break even at the operating level as fast as possible.

Dhirubhai’s son Mukesh stayed faithful to that blueprint for his old-economy ventures. But for his two new-economy ventures, Mukesh Ambani is falling back on Wall Street’s definition of OPM. RIL’s telecom play, Jio, has already raised about 1,52,000 crore from 13 technology vanguards and marquee investors. And now, it seems RIL is looking for an encore in its retail play, Reliance Retail, too—it sealed a second big capital inflow from investment firm KKR on Wednesday, and is reportedly in talks with Amazon too.

In the Ambani playbook, that’s a significant departure from the past.

It’s not just in the entry. A significant departure from the past will also have to follow in the exit. In its 47-year history, RIL has mostly shunned partnerships with large corporations and private equity, partly because it never needed them and partly because it was a stickler for control. And, on the rare occasion it brought in a partner for a project in India, it has failed to deliver a return that was worthy of the press it is now receiving for the amounts and valuation it is bringing in.

The company that is RIL today was formed in 1973 and went public in 1977. As the Dhirubhai cult grew, so did the RIL equity cult among Indian retail investors. In 1987 came Reliance Petrochemicals. In 1992 came Reliance Polypropylene and Reliance Polyethylene. In 1993 came Reliance Petroleum. They all offered shares to the public, but none brought in private investors. They were all merged into RIL.

It was not until the fifth significant company, RPL, that Ambani brought in a significant equity partner. In April 2006, US oil major Chevron bought 5% in RPL, with an option to increase it to 29%. Three years later, Chevron did not exercise that option and exited at the same price it entered at.

In the same decade, RIL also diversified into oil and gas exploration, and made strikes in the Krishna-Godavari Basin. In 2011, it offloaded 30% to British oil major BP in 23 oil and gas blocks for a total deal value of $9 billion. Another 10% was with Canadian company Niko Resources. Those oil and gas wells did not turn out as projected.

Additionally, Niko ran into trouble at a parent level. Unable to fund its share of development costs and forced into arbitration, it sold its stake to RIL and BP for $36 million. BP remains invested, but its return on investment is not known. What’s known is that it wrote off $790 million from its Indian investments in 2014. And last month, it wrote down $1.9 billion of assets in Brazil, India and the Gulf of Mexico, but did not release the details. Put together, RIL’s partners who have been around for a while have not had a bumper exit so far.

Yet, they continue to do business with RIL. Besides its investments in oil and gas blocks, this July, BP invested $1 billion for 49% in an oil retail joint venture, branded Jio-BP. Similarly, Chevron and RIL have a joint venture in shale gas in the US.

That is, in a sense, the RIL pull. It’s too big and important to ignore for multinationals eyeing an India presence. That clout—business, political, regulatory—has enabled it to raise about 1,52,000 crore from Google, Facebook, and others in return for about 33% of its telecom venture. Another 13,000 crore has come into the retail venture from two investors.

Ultimately, all these partners will judge RIL on their return on investment. In the last 10 years, the RIL stock has delivered a compounded annual return of 17%—significantly better than the benchmark BSE Sensex. However, among the index’s 30 constituents, this was only the 14th best. Above RIL are a clutch of IT services firms, banks and FMCG companies.

Much of the increase in the RIL stock was around the investments, with a 71% rise in the last six months. Embedded in these valuations is the weight of expectations. “…the market is baking in high EPS [earnings per share] growth, particularly for Jio (35% CAGR sustaining for 10 years)," said a recent research report from Edelweiss Securities. A clutch of private partners will be watching keenly to see if RIL can deliver on other people’s money.

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