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Ambani Brothers: Pals Again
A decade after their acrimonious split, Mukesh and Anil Ambani are working together while also charting independent destinies
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I am grateful to my elder brother Mukeshbhai for his unstinted support and guidance.” These few but emotional words by Anil Ambani, 56, addressed to his shareholder on 30 September this year marked the end of a long period of hostility and the beginning of a new era of partnership with elder brother Mukesh, 58. Besides family emotion, it also meant the sealing of a business deal between his Reliance Communications (R-Com) and Reliance Jio.
A decade back, the split of the Rs 100,000-crore Reliance empire left the Ambani family not only with bruised feelings, but it also gnawed into mutual trust and broke hearts. Today, harsh business reality seems to have brought the brothers together; not as one but at least with a modicum of respect for each charting an independent course.
The passing away of doyen Dhirubhai Ambani in 2002 intestate left the business house in a turmoil with regard to succession. Counsel from mother Kokilaben and elders such as K. V. Kamath and Nimesh Kampani helped the two carve their independent businesses. Mukesh got petrochemicals, oil and natural gas.
Telecommunications, which Mukesh and his wife Nita had nurtured tenderly, went to Anil, as did power generation and distribution, financial services, and entertainment. At the time of the split India was growing rapidly, helped by a boom in the global economy. The two group companies, too, grew rapidly, with some of them rocking on the stock markets. Today, after years of buffeting by adverse and recessionary headwinds and family turmoil and disputes, it is not quite the picture perfect Reliance companies presented a decade ago.
Reliance Industries (RIL) trades at around Rs 952 from a high of Rs 1,513 in January 2008. Anil’s companies are at a fraction of their highs. Reliance Infrastructure is around Rs 420, compared with Rs 2,584 in January 2008. Reliance Power is at Rs 48 from Rs 279 in February 2008. Reliance Communications slipped to Rs 76 from Rs 793 in January 2008. Reliance Capital is around Rs 389 from Rs 2,741 in January 2008.
As of date, RIL has a market capitalisation of Rs 308,453 crore, compared with Rs 24,596 crore combined market value of Anil’s listed companies. The two groups are at a tipping point and the second-half of this decade could see them changing gear yet again.
Taking a 10-year stock of the two brothers and their vast assets also shows major changes in business focus. Some have expanded; those that are not working, have been got rid of. Anil was gung-ho personally about the future of entertainment in which he invested hugely. Today, his film and media business is virtually non-existent. Ten years ago, who would have thought telecommunications and retail would be Mukesh’s potential growth leaders.
Cooperation not conflict seems to be the key words defining the current relationship. Far from the disagreements of the initial 5-6 years, including the acrimonious gas sharing issue where the Supreme Court upheld the stand taken by RIL, the brothers are sharing resources in telecom. The die was cast after five years of bitter hostility, they signed an agreement in May 2010 cancelling all existing non-compete arrangements entered between the two groups in January 2006.
While the new focus for Mukesh is telecom and retail, in addition to a massive expansion of existing petrochemicals, for Anil its entering defense and smart cities. Anil is slashing debt of his companies, reducing exposure to road and cement, refocusing to areas where they can carve a niche and significant presence, and not shying away from forming alliances to grow.
RIL, after decades of fame as a petrochemicals company, is making serious efforts to tap retail pockets. The kingpin of the plan is 4G, even as the company expands into a spectrum of areas from convenience stores, and supermarkets, to jewellery and petrol pumps.
But managing millions of customers is fraught with challenges and risk. New ventures are likely to help diversify risks as vagaries of global crude price exposes it to commodity cycles and price volatility which may impact its bottomline.
Reliance Jio could launch its ambitious 4G telecom any day now and shake up the sector. It has invested about Rs 1 lakh crore and has 2.5 lakh km of fibre optics cables covering 18,000 towns and one lakh villages. Jio already has capacity for 100 million wireless broadband users.
“The three-pronged combination of broadband networks, affordable smartphones and the availability of rich content and applications has created a global information tsunami,” Mukesh Ambani told his shareholders
While Jio has the disadvantage of entering a mature market with entrenched players, it is not saddled with a leveraged balance sheet, and hence has room to invest more and expand, said Piyush Jain, analyst with Morningstar Investment Advisor. Over a longer period, retail will complement Jio in extending their reach, customer engagement and distribution.
“There will inevitably be a consolidation in telecom space towards Jio, Bharti, Idea, Vodafone, BSNL and may be one more player,’’ said Jain.” Jio’s 5 lakh km of fiber roll out is not possible to be matched by marginal operators like Tata, Videocon and other smaller operators.”
Herein comes handy an alliance with brother Anil’s R-Com. Jio and R-Com have an agreement for sharing optic-fibre networks, bandwidth, towers, and point of interconnect infrastructure, and plans to share 800-850 Mhz band across 22 circles. The partnership will benefit both the brothers. It includes mutual roaming agreements, which gives R-Com access to Jio’s 4G LTE networks, and in return provides Jio with R-Com’s 2G and 3G networks, whenever needed. It is obviously a formidable alliance that existing telecom players Airtel, Vodafone and Idea will have to contend with in days to come. “R-Com will grow much faster with a leaner balance sheet and piggybacking on Jio’s infrastructure,” said Jain from Morningstar. With 11 per cent market share, R-Com stands fourth after Bharti, Vodafone and Idea.
The Anil Ambani group is now focused on monetising assets, slashing debt and reorienting businesses. Reliance Capital Asset Management is cementing ties with Japan’s second-biggest life insurer Nippon Life with plans to sell 49 per cent. The mutual fund grew from Rs 26,420 crore in April 2006 to Rs 152,919 crore as of September 2015, and increased its industry share to 11.6 per cent from 10 per cent.
At the time of the split, Anil’s companies had pivotal positions in telecom, infrastructure and financial services. It initially bet big on infrastructure on expectation of sustained strong GDP growth. But it was a bumpy ride after the 2008 Lehman Brothers crisis. Reliance Power was fortunate to scrape through with its Rs 11,500 crore public issue, days before Emaar MGF had to withdraw its Rs 7,000 crore IPO half way.
A tottering economy hurt the infrastructure sector, sending their debt levels soaring. R-Com has piled up debt of about Rs 38,000 crore. Anil’s foray into media and entertainment did not quite pan out as planned. His near $700 million investment with Stephen Spielber’s Dreamworks vanished into the blue, while bets in television, film-making and film exhibition have turned out to be duds. When he finally sold Reliance MediaWorks with its 250 multiplexes under the Big Cinemas brand to Kerala-based Carnival Group last year to reduce debt, Anil’s position in this sector had turned a full circle.
Fight And Win
Lalit Jalan, an Anil Ambani confidante for three decades, sums up his group’s philosophy. “We will be in areas where we can fight and win,” says Jalan, who knows Anil Ambani since their days at Wharton School of Business in 1982. Jalan as head of RIL’s polypropylene business in 1995, was the group’s youngest CEO. Today, he is in-charge of Anil Ambani’s corporate strategy and affairs.
Trimming debt is the current focus. R-Com decided on selling towers business to TPG and Tillman for estimated Rs 22,000 crore. Its other assets to be sold could value Rs 8,000 crore. Sales could trim R-Com’s debt to a single digit from Rs 38,000 crore.
A month earlier, R-Com agreed to acquire the wireless business of Sistema Shyam Teleservices in an all-stock deal. The deal will give R-Com the heft to extend the validity of its 800/850 Mhz band spectrum in eight circles, including Delhi, Gujarat, Kolkata, Karnataka, Tamil Nadu, and Kerala, by 12 years from 2021 to 2033, and also acquire 9 million customers and revenue for about Rs 1,500 crore each year. This will give R-Com superior spectrum for use in 4G — a key part for it to ally with Reliance Jio.
For growth, it is not telecom, but defense assembling and smart cities that the group is looking to as its two new drivers.
“In Reliance Infra, getting out of underperforming road assets and highly competitive cement business and investing more in the much meatier defence business is the right strategy,” said Jain from Morningstar. Defence business offers much higher margins and high return of interest business. ’’ The group is acquiring Pipavav Defence & Offshore Engineering for its expertise in naval shipbuilding, commercial shipbuilding, ship repair and maintenance, among others. In aviation, it is planning to make aerospace components and assemble helicopters at its 400-acre Dhirubhai Ambani Aerospace Park at Mihan, Nagpur.
Reliance Infrastructure through sale of roads, cement assets, and 49 per cent of distribution assets expects to be free of its Rs 16,000 crore long-term debt by 2017. It invested Rs 30, 000 crore over the past six years building assets, and expects them to start yielding cash flows from the next financial year.
The group is seeking buyers for its cement plants as also individual road projects, said Jalan. Reliance Cement has a 5.8 million tonne capacity and had earlier planned to triple capacity to 15 million tonne. Jalan expects the sale of these cement plants by the year end, and is negotiating with potential buyers.
Reliance Infrastructure also has plans in engineering, procurement and construction (EPC) as also running the power business in Mumbai. Last month, it agreed to sell 49 per cent of its power generation, transmission and distribution business in Mumbai to Canada’s PSP Investments by carving a special purpose vehicle for an unstated amount.
RIL is in the process of investing Rs 2 lakh crore, which will start fructifying from mid-2016. More than 100,000 people are working round the clock on petrochemical projects, and another 150,000 employees have been pressed into making Jio a success.
The biggest of these investments are in petrochemicals and refining, aimed at expanding these businesses at Jamnagar, Dahej, and Hazira, as also the US shale gas project. Through investment into petrochemicals, the company is adding to its capacity of PTA, PX, elastomers, and building ethylene cracker, which will cater to small scale units, automobile industry and provide import substitutes to other industries.
“The group’s prowess is in identifying sound businesses and building large projects with economies of scale,” says Jal Irani, analyst with Edelweiss Finance in Mumbai. “The philosophy doesn’t change. The time-tested business is petrochemicals and refining. One has greater degree of confidence that they will be earning profit and making good returns.”
Petrochemicals and refining are likely to be near term drivers, while telecom and data will be the key with long-term gestation, said Irani of Edelweiss. In the first four to five years, it’ll be tough for telecom business to make profit, he forecasts.
Reliance officials declined to speak to BW Businessworld for the purpose of this article.
In 2010, Reliance signed up a joint venture to enter into the US shale gas industry, earning about $1 billion. Yet plunging gas prices made its investment unprofitable. Reliance said it wants to become a major player across gas value chain in India though one is yet to hear more from it. Since striking gas in 2002, Reliance has been producing natural gas from KG basin since 2009 as also light crude oil. Yet gas pricing is elusive and risky, and the group’s aggressive expansion into telecom has also to be seen in this context.
However, for a company of such humongous proportions, the only big risk analysts see is that of executing projects to perfection. “A key risk will be executing what they’ve promised,”says Irani. They are in the process of investing $35 billion; that is almost as large as the current balance sheet size, he adds.
A key for Jio will be how to get higher average revenue per unit (ARPU), just as use of data begins to explode, and its cost begins to implode. For Mukeshbhai and Reliance Jio, telecom will be a challenge as it’s a consumer-facing business and needs servicing a long and delicate chain. Retail businesses have turned the corner and the ‘J’ curve of profitability has begun to happen, said Irani.
“It’ll be gold standard for 4G services,” Anil Ambani said about the R-Com and Jio tieup.” The overall strategic partnership is a virtual consolidation in the telecom sector. It will make my father happy in heaven and my mother Kokilaben, present here.”
Could the bonhomie be the harbinger for a home-coming for the two? Facing harsh business realities and the possibility of success in working together in telecom, are obvious incentives for group companies to work closely in areas of synergy, say industry watchers. Does it make sense to extend the partnership? It may seem like a long shot now though nothing’s impossible in the long run.
[email protected]; @mediasumit
(This story was published in BW | Businessworld Issue Dated 28-12-2015)