News: Ambanis divided but still ruling

(DNA 18/06/2006) Mumbai - “This is just the beginning,” drawled Steve Ballmer, Microsoft Corp. chief executive officer as his speech was streamed live from Seattle on a giant screen at the Bombay Stock Exchange’s Rotunda Hall.

Ballmer wasn’t referring to Microsoft. His kudos was meant for Anil Ambani and his flagship company Reliance Communications, seconds before it made its sparkling debut at the bourses.

The Microsoft CEO’s remark holds true even for Mukesh Ambani, and Ballmer may as well take a few tips from the Ambani brothers as he puts Microsoft back on the path of blistering growth.

Exactly the same day last year, Kokilaben Ambani, the matriarch of the undivided Reliance group was among the very few who were confident that her sons would “enhance value” for its over three million shareholders of the group, after splitting the businesses between them.

After organising a truce between the brothers, Kokilaben had decreed in a letter, “Mukesh will have the responsibility for Reliance Industries and IPCL, while Anil will have the responsibility for Reliance Infocomm, Reliance Energy and Reliance Capital”.

Since then, the Ambani brothers have unlocked huge value for the Reliance group shareholders.

After Anil’s visit to the bourses, it was Mukesh’s chance to visit the Rotunda hall to list a new company -Reliance Petroleum - as he adroitly capitalised on a bull market to raise funds for a project that will start production two years hence.

Just as well. A divided Reliance has shareholders as the biggest gainers, having unlocked tremendous value for them. But it is not valuations alone where shareholders have gained. An opaque group seemingly became more transparent after the resolution of the “ownership issues”.

The gainers include the promoter family as they own 38% of the group enterprises and perhaps more in Anil’s group companies.

Shareholder wealth has swelled as the two brothers went their separate ways.

The brothers have been quick out of the blocks. Both groups have prepared blueprints for an unbridled expansion and diversification.

J M Morgan Stanley, a leading foreign brokerage says in a report - titled ‘Building core assets’ - released this week, “Reliance is one of the few Indian companies investing aggressively for growth with a capital spending plan of $9 billion (Rs 41,300 crore) over the next three years”.

Anil’s Reliance ADAG is not far behind. It has earmarked $13 billion (Rs 60,000 crore) investment in power projects with an ambitious plan to foray into nuclear energy.

“Reliance Energy is also keen to foray into nuclear power generation, as it has good experience in engineering and designing for nuclear power plants,” Anil told Reliance Energy shareholders recently. Reliance ADAG’s investments do not include other forays it plans to make, notably in metro rail and telecom, where investments exceeding Rs20,000 crore is envisaged.

Are these numbers too ambitious and are the brothers overstretching?

Mukesh has the advantage of massive cash flows (Rs42,000 crore) accruing from his petrochemical and refinery business and Anil has not done too badly either having raised funds at the right time for Reliance Energy and Reliance Capital.

“With cash flow from operations equating to $9 billion over the next three years, and a current conservative net debt to equity ratio of 0.72, the company has the ability to invest in new businesses such as retail and special economic zones”, says J M Morgan Stanley in its report on Reliance Industries.

It is not that the past discord is forgotten. It heightened at the time of the handing over of the four resulting companies that included Reliance Natural Resources. It became an ugly brawl which quickly subsidised as Reliance ADAG took control of the four resulting companies and changed some clauses in the agreement that were detrimental to its interests.

It came head to head, when Mukesh outbid Anil recently for the proposed convention centre in the Bandra-Kurla complex.

In less than a year, the de-merger has seen the two groups diversifying by entering sectors that are unrelated to their present businesses. Both seem to be in a hurry, as the brothers try to make up for the lost time.

Anil and Mukesh are incommunicado most of the time, preferring to speak to investors occasionally.

Anil timed another move very well. He seized an opportunity to step down as the member of the Rajya Sabha, coinciding with the time that Sonia Gandhi, chairperson of UPA chose to resign from the Lok Sabha.