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Reliance: What to make of it - Views on News from Equitymaster
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Reliance: What to make of it
Nov 26, 2004

The recent feud over ownership issues has resulted in India’s largest private sector business group witnessing major losses on the bourses during the last week. Yesterday, six directors resigned from the Reliance Energy Board, further fuelling the controversy. The stock witnessed a fall of 6% yesterday and we believe the trend is likely to continue in the short-term, unless some patch up occurs soon.

Company Price on
Nov 18 (Rs)
Price on
Nov 25 (Rs)
% Change
BSE-SENSEX 6,025 6,035 0.2%
RELIANCE ENERGY 628 549 -12.6%
RELIANCE 546 504 -7.7%
IPCL 189 175 -7.1%
RELIANCE CAPITAL 139 136 -1.9%

Let us now look at the various businesses held by the group and how the synergies combine to make it a powerful business enterprise.

Reliance Industries: The parent company, sized nearly 3.5% of the country’s GDP, is principally involved in the petrochemicals and refining businesses. The company also controls IPCL, and together accounts for nearly 70% of the petrochemical capacities in the country. Reliance Industries has also ventured into exploration activities and is set to start production from its Krishna Godavari fields in FY07.

Reliance Energy: Reliance Industries holds nearly 50% in Reliance Energy and has played a substantial role in arranging for the finances for the power projects entered into by the company. Recently, Reliance Energy announced plans to set up a mega gas-based power plant in Uttar Pradesh, the gas for which is likely to be utilised from the parent’s Krishna Godavari gas fields.

Reliance Infocomm and other Reliance Group companies: While it is not clear about the funding pattern of Reliance Infocomm and other group companies like Reliance Capital, Reliance Infrastructure, Media companies and so on, Reliance Industries has historically been the cash generator for the group.

Implications:


While it is too early to comment on the possible scenarios and the consequent impact, the fact that Reliance Group, as a whole, benefits from group synergies, is a very critical factor that would shape the way things would pan out. Reliance Energy was planning to utilize the gas finds to fuel its power generation ambitions from a long-term perspective. Reliance itself, through its refining, petrochemical, marketing presence, is in a massive expansion mode for which it needs capital. Reliance Infocomm also is a capital-intensive business with long gestation period. The Group could suffer on various counts if the current worries over management control continue.

  1. Confidence and stability in the top management is extremely critical when it comes to the comfort factor for retail and institutional investors. Continued spat by the top management is likely to dent this confidence and consequently, have an adverse impact on the valuations.

  2. Reliance is known and acknowledged for its execution skills (funding of projects, sourcing of technology and materials and so on). But with the management tussle, the execution side could come under a cloud owing to dilution of focus.

  3. The synergic benefits between group companies could be diluted and this in turn could affect the expansion plans and stock valuations.

  4. It is also likely to have a broader impact on the market sentiment, as Reliance Group enjoys the support a huge 3.5 m shareowners. It is estimated that 1 out of every 4 Indian investors owns a Reliance shares.

Our View:


While we have not factored in the likelihood of this ongoing tussle (practically difficult), investors need to practice caution. Either one could wait for the final outcome - whether the crisis is resolved amicably or there is a protracted legal battle on the horizon - which should be clear in a few days, or exit as a matter of caution. The issue further highlights the classic risk that even a professionally managed enterprise is not insulated from the bickerings of the ‘family’ that oversees it. Ultimately, minority shareholders are caught in the middle of it.

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