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The Indian Conglomerate... - Views on News from Equitymaster
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  • Jun 17, 2000

    The Indian Conglomerate...

    What started out as a polyester fabric wholesale business in the bylanes of Bombay, today is at the commanding heights of the Indian industry and all this within a period of twenty six years. Post liberalisation (1991-92), with the opening up of the industry to increased competition, business houses have bumbled and are now in the process of restructuring to be more focused and efficient. In this period, Reliance has grown from strength to strength; liberalisation has been its inflection point while for others it rang warning alarms. This briefly highlights how management's react to change in business environment and need one say which is the right approach.

    (Rs m) FY92 FY00 CAGR**
    Sales 29,530 203,010 24.0%
    Gross Profit 5,750 47,460 26.5%
    Profit After Tax 1,630 24,030 35.0%
    Share Capital 1,520 10,530  
    FDEPS* 2.0 23.0 31.0%

    * FDEPS - Fully diluted EPS
    ** CAGR - Compounded annual growth rate

    Reliance may not inspire the Robert Dahl's of the world but it has definitely understood the dynamics of a competitive environment. One does not have to go to business school to learn the rules of survival in the market place. Reliance it seems has clearly understood the relationship between Darwin's 'Evolution of Species' and the markets, both inherently operate on the paradigm of survival of the fittest, a capitalist ideology.

    With our history of socialistic thinking, Reliance may not have been viewed favourably in the past and even so today by the Indian society. This is not a eulogy on Reliance but the only business magnates that Bill Clinton, President of the largest capitalistic society met personally on his sub-continent trip was the Ambani family. This is probably in recognition of the similarity in economic ideology and succeeding in an opposing economic system.

    In recent years, Reliance has aggressively diversified its portfolio into strategic businesses and is threatening to become a Tyrannosaurus-rex. Reliance is probably the perfect example of backward integration. With the advent of liberalisation it was aware of the impending competition, the question was only of when? Being proactive it set up huge, state of the art operations comparable with the best of breed in the world.

    The basic raw material for petrochemicals is Naphtha. The petrochemical industry in India is highly fragmented; this adversely affects the health of the sector. Consolidation is on the cards with Reliance at the forefront, in the past two years Reliance has acquired a number of smaller units. It is focusing on specialty, high value products, which are closer to the final consumer as compared to commodities. This will enable Reliance to brand and consequently differentiate its products, thereby command a higher price.

    In setting up Reliance Petroleum Ltd. (RPL), Reliance has achieved a record of sorts.

    • It completed the 27 m tonne refinery at Jamnagar in less than thirty six months; this is a world record for setting up a refinery of this size, complexity and scale.

    • It represents the largest industrial investment ever made by an Indian group at any one location.

    RPL has already achieved rated capacity and is expected to record a turnover of Rs 250 bn, making it the number two private sector company after Reliance Industries (RIL).

    The major feedstock for refineries is crude oil. Reliance has entered into a joint venture with ENRON and ONGC for oil & gas exploration and production. Under the new exploration licensing policy (NELP) Reliance has been awarded fourteen off-shore exploration blocks, the total oil & gas field acreage with Reliance is more than 100,000 square kilometers. This will reduce Reliance's dependence on imported crude and hence the impact of oil shocks.

    Power also has synergies with Reliance's existing business. Naphtha, HSD or gas can be used as feedstock for the power project; Reliance has access to all these in-house. Reliance has plans to set up 10,000 MW of power within 5-10 years. It already has plants operating mainly for captive use at Patalganga and Jamnagar. It can leverage on this knowledge to become a major player in the power generation. As for distribution, BSES offers strategic benefits, though RIL's bid for BSES was more to meet SEBI's takeover guidelines, wherein any party whose holding in a company crosses 15%, has to make an open offer to the remaining shareholders for at least 20% additional stake. Once the offer is completed it can acquire an additional 5% stake every year without triggering the code.

    For its telecom venture Reliance has cellular licenses for 7 circles and basic telephony license for Gujarat. It also has plans to set up a broadband network in Gujarat. It plans to expand its optic fibre cable network throughout the country; this will qualify it to participate in long distance domestic and international telephony as when it is deregulated.

    While other companies have made India an attractive market for consultants, Reliance has steadfastly built up its business portfolio and now threats to be a global conglomerate.



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