Anil Ambani’s Dream Falters

Dhirubhai’s younger son once had the grandest of plans for his half of Reliance. Today, he has little to show for them.

Retd Colonel RL Sharma, 75, is an angry investor today. He has been a shareholder of Reliance Group since 1978, when he purchased Reliance Industries Ltd (RIL) on the stock market a few months after the first public issue of the company founded by Dhirubhai Ambani. But since the founder passed away and his two sons Mukesh and Anil split the group in 2005, he is unhappy with the performance of Anil Ambani’s companies. The reason: all his investments, except one, in the younger brother’s firms have run him huge losses. For instance, he subscribed to Reliance Power’s shares offered by its initial public issue (IPO) in early 2008 at Rs 330 per unit, and its market price today is 40 per cent of that figure.

“My friends and I have lost money with Anil’s companies,” Colonel Sharma complains bitterly, “We got sucked in by the hype, especially in the case of Reliance Power, where the grey market price touched Rs 1,000 a share. Now I feel that Anil doesn’t have the execution abilities to set up large projects.” (Ironically, Colonel Sharma is still in the black with Reliance Natural Resources Ltd, despite its share price having tumbled by almost a third in the few days after the 2:1 Supreme Court verdict on the Ambani gas dispute.)

In private, Anil Ambani hates investors like Sharma, in addition to a section of the media that he contends unfairly keeps harping on his inability to set up projects from scratch. His supporters react strongly when confronted with such arguments. “Unlike Mukesh, Anil hasn’t inherited ‘legacy’ businesses,” they retort, “Anil’s businesses are new ones. And he has executed them single handedly, since, after the split, 99 per cent of the Reliance Group’s managerial bandwidth chose to stay with the elder brother.”

However, Anil still has to prove his capabilities. Sure, in the past five years, he has inked exciting deals like the $850 million investment in a tie-up with Steven Spielberg’s DreamWorks to produce Hollywood movies. He has announced grand plans to transform Reliance Capital into a one-stop shop for all financial and banking products. He has threatened breathtaking acquisitions like MTN of South Africa. He has bagged prestigious power projects, including three ultra mega power plants (UMPPs).

Unfortunately, he has nothing to showcase for his investors. His first power plant, among the new ones, must wait till 2013—and that’s a long wait for Reliance Power shareholders who bought their shares in 2008. No one knows what’s in the movie pipeline with Spielberg. Even his diehard friends offer the lame excuse that no one “can ask Spielberg to produce a certain number of films every year”. After the MTN debacle, Mukesh is likely to block all of Anil’s global takeover attempts in telecom.

The question marks on Anil’s future have multiplied after the Supreme Court judgment, which denied cheap gas to his gas-fired power plants. For many observers, it implies the end of his ‘profitable’ power dreams. Anil will now have to pay the same price of $4.2 per unit as any other buyer, instead of getting an assured supply from his elder brother at a throwaway price of $2.34. According to a recent report by Macquarie Equities, at the higher price, there is no ‘value add’ for Reliance Power shareholders.

One isn’t sure if Mukesh’s RIL will supply the gas to Anil. After the apex court left all decisions related to price, quantity and tenure in the hands of the Government, Finance Minister Pranab Mukherjee said that Anil will get the gas as and when it is available. At present, the bulk of RIL’s peak output has been allotted as per the Government’s utilisation policy. So, Anil can ask for gas supplies for his plants only if RIL finds fresh reserves in new fields, or hikes production from existing ones.

Without the gas, Anil’s aim to add over 10,000 MW in two units (including the one at Dadri, Uttar Pradesh) will go up in smoke. And the Dadri power plans are anyway in doubt as long as Mayawati stays Chief Minister of UP because of Anil’s close proximity to her archrival Mulayam Singh Yadav. However, all this doesn’t deter his friends. One says that RIL still hasn’t found buyers for its gas, despite the utilisation policy. Even if RIL’s gas is unavailable, Anil can source it from global suppliers. “Finally, the price of the gas doesn’t matter, as it gets added to the costs as a pass-through expense. Anil’s fight with Mukesh on price was based on principles,” concludes a close aide.

Another friend adds that Anil can still kindle his ‘coal-based imagination’. If one subtracts 10,000 MW from Anil’s overall power plans, he has projects of 23,000 MW under his belt, including 12,000 MW to be set up under the three UMPPs. One of these, at Sasan, has seen financial closure and should be commissioned by 2013. In addition, two of the UMPPs, including Sasan, are based on captive coal fields, which can supply cheap fuel to the plants for decades.

Critics maintain that the coal fields are ‘undeveloped blocks’ and one is not sure about the quantity or quality of the coal available. The Macquarie report adds that ‘with financial closure achieved for only 17 per cent of (Reliance Power’s) project pipeline, we believe it still has a long way to go regarding project execution’. So, in the research firm’s view, the Reliance Power stock is an ‘under-performer’, whose price could fall to just over Rs 100 over the next 12 months (it was at Rs 141 while going to press).

There is uncertainty about telecom entity Reliance Communications (RComm) as well. Incidentally, during the split negotiations with Mukesh, Anil alleged that his elder brother mismanaged RComm and used RIL’s cash to benefit himself as well as finance telecom-related losses. Today, there is acceptance within Anil’s camp that RComm’s future is clouded. “It’s like a momentum business, where we add a few million subscribers every month with no clear direction,” says a Mumbai-based source.

In the domestic telecom market, growth in the number of subscribers is offset by falling rates, which squeeze margins by the day, a problem compounded by declining ‘Arpu’ figures (average revenue per user). Sure, RComm could have grown globally, as Bharti Airtel has done with its Africa acquisition, but that path has been completely blocked by Mukesh, at least till 2015.Under the MoU signed between the two brothers in June 2005 to split the Reliance Group, both brothers have the ‘first right of refusal’ for ten years on any sale of their stakes in existing companies. Since a global acquisition in telecom is likely to be a combined cash-and-equity one, which involves equity swaps between the merging entities, Anil has to offer Mukesh the first option to buy his stake. Since Anil would never do that, such takeovers are out of bounds for him, as was proved in the MTN case.

So, the only option for Anil is to expand the telecom business, despite wafer-thin margins, and expect a change in fortunes by 2015. Or wait for consolidation in the Indian telecom market, where RComm may be in a position to buy out smaller players. “But we are still making money in this market, where we shouldn’t be making any, especially from the non-sexier part of the business like fibre optics and the enterprises segment,” says someone who knows the inner workings of RComm.

Anil’s Reliance Infrastructure and Reliance Capital have both announced impressive plans, but face several obstacles. For one, he is competing directly with Mukesh on several infrastructure projects. The bidding war is going to be intense, and both could end up on the losing side.

The winner may overbid and the loser is likely to lick his wounds before preparing to strike again. Two, Anil will need all the help from the Government, which he has publicly criticised lately, to propel his forays in the financial services sector. His proximity to former Samajwadi Party leader Amar Singh (as also Mulayam) had once alienated him from the ruling Congress, which limits his ability to ‘manage the environment’ (clout that even his elder brother appears to have lost in recent times).

Even before the Ambani split, Anil had said in private that he would grab a banking licence and transform Reliance Capital into a financial powerhouse. It didn’t happen; only in this year’s Budget has an intended issuance of new licences for private banks been announced. But it’s not clear whether the Centre will oblige Anil or not; that the banking sector should be walled apart from the industrial sector is a principle that has several adherents in policy circles. At the same time, one has to admit that Anil has entered new areas such as insurance and consumer finance, and consolidated Reliance Capital’s numero uno position in the mutual funds industry.

A recent report by investment bank Edelweiss says that while it expects Reliance Capital ‘to become a leading financial powerhouse offering a plethora of products… execution failure is the key business risk, as its value-driving businesses are either at a nascent stage (life insurance and retail broking) or are yet-to-be-launched (consumer financing).’ Yet again, it is a wait-and-watch game to see whether Anil can deliver the results expected by his legions of shareholders.

Even the easy opportunities that Anil had to prove himself, he made a hash of somewhat. Take Big Entertainment, which was pitched as an endeavour that will launch two dozen TV channels, and create prime-time content for others. Together with the Spielberg venture and Adlabs takeover (with its share in the movie-producing and distribution business), Big Entertainment aimed to become the foremost name in the country’s big- and small-screen market. “The dream is all but over,” says a former employee, “we are not even sure of what will come of Spielberg. Most employees have been sacked and the project has been scaled down to content creation for other channels. Even this hasn’t taken off.” A current employee admits sarcastically that the TV channels were never meant to happen: “No one, especially Anil, was ever serious about them.” At present, all hopes are pinned on a few Bollywood (like 3 Idiots and Rock On!!) and Hollywood blockbusters (with DreamWorks).

As for Anil’s radio business, the less said the better for him. Despite 45 FM channels, the largest number for any private player, Big FM ranks no higher than No 3 or 4 in each city. A former employee says that Big FM is No 1 in Srinagar, but only because it is the only FM channel there. Someone who understands this business thinks that Anil never wanted his channels to be No 1 or 2. Another one who has known Anil for at least two decades admits that radio was “always meant to be a promotional platform for our films”.

Then, there’s a healthcare plan that few are aware of. In 2006-07, Anil was gung-ho on this business, buying land in five places for a chain of tertiary-care hospitals, and was in talks with leaders like Max and Apollo for joint ventures. At that time, he wanted health insurance to work in alliance with this venture, but it came to naught as it was abandoned in less than two years. The only hospital that got working was Mandke Hospital, renamed Kokilaben Dhirubhai Hirachand Ambani Hospital. But today, it is in shambles for lack of an adequate budget to buy medical equipment and stock medicines. Rues a former employee, “When it came to a crunch, Anil trusted his old loyalists rather than professionals. And his kitchen cabinet could never understand this business.”

Nor is Anil’s outlook too rosy in businesses his group does understand—like telecom and power. What can tilt the balance in Anil’s favour is his ability to make things happen. Gone are the days when he could blame his brother for his troubles. Not too long ago, Anil’s camp used to crib that its approvals are being stalled or delayed, and it blamed Petroleum Minister Murli Deora for its troubles in the lucrative oil & gas sector. Not anymore.

Anil needs to get a grip of reality. Can he? We are not so sure. The reason: Anil’s friends dissuaded us from writing this article, arguing that a better piece would be on the future of both brothers. “Why do people only blame Anil? Look at Mukesh’s group. After the family split, it entered 17 new businesses. Of these, retail was a spectacular failure—it burnt nearly Rs 10,000 crore of shareholders’ money – and so were plans to set up special economic zones, and enter areas such as life sciences, hospitals and pharmaceuticals,” says one of them.

Clearly, the battle of egos, one-upmanship and jealousy is still on. And this is one war that can hurt Anil much more in the short run, especially now. Anil, run with your projects, not with negative emotions against your brother.

Anil AmbaniReliance