Mukesh, Anil, you & me

My neighbour, a god-fearing, stock market-shunning man, watched the session in his suit, delaying his day by half an hour. All his money lies in his provident fund, the PPF and bank fixed deposits, and there he was, all-attentive, watching the drama unfold. It does that to people — this company called Reliance, whose revenues of Rs 73,164 crore add up to 2.6 per cent of India’s GDP, whose market capitalisation of Rs 129,339 crore is 5 per cent of BSE’s total market capitalisation, whose weight in the Sensex was 12.1 per cent, whose price is up 50 per cent since June 2005.

Without doubt, this historic special trading session would have been the most speculated, the most looked forward to, the most planned trading session. But what’s all this fuss about? Reliance is just another company — it may be India’s largest in the private sector, it may be the most valued private sector company, it may be the world’s largest producer of PFY, the third-largest producer of paraxylene… But so what? Finally, for an investor to get interested in a company, it needs to perform.

The latest quarterly results where its profits fell 15 per cent, notwithstanding, Reliance has been a performer on all fronts. The past five years have seen its turnover rise at an amazing 35.8 per cent per annum. Amazing because a company of this size tends to move slower (Hindustan Petroleum, for instance, in the same period, has grown by 11.7 per cent per annum to Rs 64,690 crore, ONGC by 18.4 per cent to Rs 47,245 crore). Its bottomline has grown by 25.8 per cent per annum to Rs 7,572 crore, making it India’s second-largest profit making company.

Reliance as we have known it since 1977, when it first listed and created an equity cult among small investors, is not the Reliance we see today. Like many second generation inheritors, brothers Ambani have split the company into two groups. Mukesh will now run the cash-generating petrochemicals business, Anil will lead telecom, energy, finance. Evaluating Reliance today is taking a call on the leadership skills of the two brothers, experts say.

Really? What the market says is that as a unified conglomerate, Reliance had the advantages of scale — the economies, the cash flows, the investment leverage. It had the culture, the ambition and the resources to think big like no other entrepreneur had thought. Its strength was creating huge assets, massive capacities, on an unheard of scale. The duo worked well — Mukesh set up projects, Anil engineered finances. Now, says an observer, they will have to gain experience in one another’s strength. Particularly, because both businesses need both these skills.

While I agree that the leveraging strength of individual businesses has fallen, I’m not sure how accurate the analysis on personal strengths leading to company performance is. Both brothers today control businesses and have the resources to hire the best talent. Assuming in the earlier disposition the brothers were indeed dependent upon one another, it might not be too hard for Mukesh to get a top-rung finance man or for Anil to get a project implementation star. Both have the capacity to attract professionals from across the world. While much reporting on the Group has been personality oriented — first Dhirubhai, now his sons — we can’t ignore or undermine the fact that companies with scales can’t be run by individuals alone.

While that is in the realm of speculation, the question can be contextualised. What if the company was from the Tata or the Birla Group, would the same individual focus have been the centre of attention? Unlikely, as the companies are in businesses that are well established, largely commodities. Where the nature of the business is young, say retail or technology, the diversification of the group has been institutionalised from Day One. Nobody is unduly worried whether it’s Ratan Tata or Kumarmangalam Birla running the show or a fistful of professionals.

Financially, in the arena of cash leverage, the strength of spun off entities will weaken. While Reliance Industries will continue to get triple-A rating for most of its paper, I wonder whether the companies spun out, Reliance Communication Ventures (RCV) and Reliance Natural Resources (RNR), will get the same rating, given their short track records. Both brothers have expansions planned out for their companies. Reliance Industries is looking at becoming the world’s largest refinery in the next three years and envisaging investments of Rs 47,000 crore. The telecom businesses that RCV holds are all in a growth phase and will need serious money to flow through its lines before maturing.

Reliance Industries is likely to take the debt route and will be able to raise most of the money with ease. For a company that quotes at PEs of 10-12 times earnings, debt is the natural route for financing. For Reliance Infocomm, which currently is being likened to and benchmarked against Bharti Tele-Ventures (PE: 64), equity would be the more efficient route. If Mukesh’s company will see a higher interest outgo, Anil’s companies will dilute equity. Not the best of news for investors.

The good news, however, is that investors will see gains come their way through the unlocking of shareholder value as the spun off entities get listed. For every 100 shares of Reliance Industries, an investor gets seven shares of Reliance Energy (quoting at Rs 598 apiece) and five of Reliance Capital (Rs 436). The investor will also get 100 shares each of RCV (the holding company of all telecom businesses) and RNR, both of which should get listed “in due course” — we wait. The bigger question the Reliance demerger raises: will this way of unlocking value for shareholders become a trend for other traditional businesses?