Let us accept the truth that Mr. Anil Ambani is one who is a victim of an adverse business environment, where a range of external factors from stiff competition to betting on the wrong technology to an economic slowdown had gone against him. Life certainly has not been kind for him. Imagine once the sixth richest person in the world, with a wealth of USD 42 billion has recently given a testimony in a British court that his net worth was zero. However, he is not someone who squandered away his wealth or flew away in his private jet to a foreign country.
There is a fall from the grace of his group in the last twelve years, nevertheless, the position is getting better and is much better than a year ago. This is in spite of the continuous bashing by a fifth-generation politician. The recent developments initiated by Anil Ambani’s new lieutenants, not to exclude his sons, indicate a change for good. These are considered to be rational decisions. We believe that there will be consolidation in the group. Some of the companies not doing well are likely to meet RCom’s fate while others will lead the revival of the group.
The shares of Reliance Group of Companies (earlier known as Reliance Anil Dhirubhai Ambani Group) are soaring and most of them hitting the circuit. This has definitely boosted the net worth of its promoter, Anil Ambani. The combined market cap of the companies controlled by him has increased by a whopping 330 percent in the last three months. The current market cap of group companies is around Rs 10,000 crore up from Rs 3000 crore at the start of March 2021.
It is a pale shadow of what his companies commanded market cap in the year 2008, when he was the sixth richest person in the world according to Forbes, with a wealth of USD 42 billion. It was an era when he was credited with India’s largest IPO, that of Reliance Power, which in 2008 was subscribed in less than 60 seconds, the fastest in the history of Indian capital markets to date.
There is a fall from the grace for his group in the last twelve years, nevertheless, it is much better than a year ago when promoter Anil Ambani, who in the year 2020 told a British court that his net worth was zero.
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What led to such a drastic fall of the group, which gained the dubious distinction as one of the fastest destroyers of shareholder wealth in the last 100 years? The combined group market cap declined by 99 percent from its zenith (Feb 2008) to nadir (March 2020). The more important question is that the current resurgence in the market cap of companies is for real or there are some operators trying to take advantage of euphoria in the market? Will the companies prove to be a Phoenix or current uptick is just flash in the pan? Most of it will depend upon how the promoter of the companies will handle the situation going ahead. Therefore, we will first explore the intention and grit of the promoter himself and after that the business, he is into.
Anil Ambani: From Flamboyant to a Modest Entrepreneur
Anil Ambani, who had received a Master in Business Administration from the Wharton School of the University of Pennsylvania, one of the ivy leagues colleges, was the younger of two sons of Dhirubhai Ambani, the founder of Reliance Industries. He was flamboyant, more outgoing and the public face of Reliance Industries. He was a financial wizard and represented the company in most of the roadshows held the world over to raise finance for different ventures since the 1990s. It was under his guidance, in February 1994 the company made the biggest GDR issue of that time of USD 300 million. Contrary to his elder brother, Mukesh Ambani, who was regarded as highly determined as well as being a talented engineer and manager, Anil Ambani appeared as the public image-maker of Reliance, talking to the press and investors. Thus the two brothers were complementing each other.
Nevertheless, what differentiated them were their acquaintances and with whom they spent time. The elder brother was trying to project Reliance as a modern corporation run by professional managers. He surrounded himself with old and trusted recruits like his former schoolmates Anand Jain and Manoj Modi. At the same time, Anil’s friends’ circle comprised mostly from outside the company, including some from film industries and politicians. The flashy Anil, who is married to a former film actress, likes designer clothes and jogs every morning, his chauffeur driving slowly behind. He always had dreamt big and wanted to do things in scale.
Anil seemed to have got what he wanted after separation from Reliance Industries. He got new-age telecom business, along with the financial services and energy business, which held, then, a lot more promise than the oil to chemical business. He looked like a go-getter, ready to tap into the potential of the Indian mobile telecom revolution and, along with it, take the fortunes of his group to great heights.
Many of the businesses that he got after the demerger of Reliance Group were cash hungry. He received parts of Reliance Group with interests in telecom, entertainment, financial services, power, and infrastructure. The riskiest investments he made, however, were in power and infrastructure. Driven by cheap capital in the 2000s, not to be left behind, Anil secured three of the major ultra-mega power projects auctioned by the government in 2008 and 2009, at Sasan in Madhya Pradesh, Tilaiya in Jharkhand, and Krishnapatnam in Andhra Pradesh. Meanwhile, Reliance Infrastructure was bidding for projects in railways, power, and roads.
Anil Ambani was not alone in this race, others such as Ruias of Essar, G.M. Rao of GMR Group, and G.V.K. Reddy of the GVK Group were others who got into high leverage and saw their net-worth declining in the next decade. Coming before the economic slowdown that followed the crash of Lehman Brothers in 2008, businesses were in a mood to splurge over acquisitions and expansions, both at home and abroad. We saw even Tata group doing a couple of large foreign acquisitions in the same period.
What really hurt Reliance Group the most was that he spread himself too thin in business and high leveraging of debt to fuel expansions that can bring down business empires. And exactly this has happened. What added salt to injury was turning the business environment adverse.
State-owned banks that stood the test of time during the great financial crisis of the year 2008, had now amassed huge non-performing assets (NPA) after indiscriminately lending to infrastructure and power projects. They were reluctant to fund the sectors anymore, even as many projects turned non-starters owing to land acquisition issues or problems with fuel linkages for power plants. As if all this were not enough, Anil entered into a long-drawn legal battle with Mukesh over the price of gas from Mukesh’s oil fields in the K-G Basin to fuel Anil’s proposed 4,000 MW power plants in Dadri, Uttar Pradesh.
The situation became much worse during 2012-13 when nearly Rs two lakh crore worth of projects were stuck after the bureaucracy went into a policy logjam following the 2G spectrum controversy and Coalgate, where irregularities were made regarding allocation of coal mining rights. (Anil too was drawn into the 2G accusations, with the CBI questioning him in 2011 amid allegations that Raja favoured his group on dual technology permits, and RCom’s association with Swan Telecom, which was being investigated for alleged diversion of funds to Kalaignar television, owned by the DMK.)
What also went wrong with RCom was the technology they had adopted. When it started out as Reliance Infocomm in 2002, it chose CDMA (Code Division Multiple Access), against the GSM (Global System for Mobile) platform, used by their competitors like Airtel and Hutchison Max have now known as VI. However, CDMA was limited to 2G and 3G (second and third generation) telephony. When the tide turned in favour of 4G in India and 5G in the future, RCom began to lose out. The fate would not have been different if the telecom business would have been in the hands of the elder brother.
Trouble Stayed Late
Unlike the popular song of the Band of Heathens Trouble Came Early goes “I lost it all and all I really know Trouble came early, trouble stayed late,” Anil Ambani’s trouble didn’t come early but it certainly has stayed late.
The real trouble started around 2014 when the group companies began to feel the brunt of their huge debt (total group companies’ debt stood at Rs 1.72 lakh crore as of September 2018) on their books. In order to set the house, the company began to sell off assets to repay the debt. In August 2018, Reliance Infrastructure, which had projects including the airport express metro corridor in New Delhi under its belt, sold the Mumbai city power distribution business to Adani Group for Rs 18,800 crore. This transaction was expected to bolster Reliance Infra’s financials by repaying part of its over Rs 23,000 crore debt. Nonetheless, it was like a needle in the haystack and major trouble was brewing on the horizon.
In February 2020, Anil Ambani was locked in a legal battle with three Chinese banks led by the Industrial and Commercial Bank of China, after last year’s collapse of his telecoms company Reliance Communications. He was asked to set aside USD100 million by the court. This is the moment when he made the statement that his net worth is currently zero after considering his liabilities. The dispute still rages on with the UK court ordering him to pay the three Chinese banks to the tune of USD717 million.
Appearing through video link in the month of September 2020, Anil Ambani confessed, “I lead a much-disciplined life. I am a marathon runner, and a believer in God and family and I live with my mother,” he told the court, adding that he did not drink, smoke or gamble. “My needs are not vast.” The 61-year-old was cross-examined for a day by lawyers for the Chinese banks who were given permission by the judge to question Mr. Ambani as they decide how to enforce the court’s order. He also said to the court that, the suggestion of a lavish lifestyle past, present, and future, is completely speculative, a creation of the media.
The point that we wanted to derive is that he is not someone who squandered away his wealth and flee away in a foreign country. He is one who is a victim of an adverse business environment, where a range of external factors from stiff competition to betting on the wrong technology to an economic slowdown had gone against him.
What Next?
Most of the businesses that Anil Ambani owned suffered from business downturns. What also impacted him was the lack of close and trusted aides that his brother has in the form of Manoj Modi, Nikhil & Hital Meswani, and P.M.S. Prasad. But, we strongly feel now the situation may change as his sons are taking the reign. Some of the ‘ruthless’ decisions taken recently could not be attributed to Anil Ambani, considered in his friend’s circle a very very ‘emotional’ person. Whatsoever may have been the reasoning behind, yet those are considered to be rational decisions. It gives a hint the boys are determined to revamp the group. We believe that there will be consolidation in the group. Some of the companies not doing well are likely to meet RCom’s fate while others will lead the revival of the group.
We believe the following two companies will see revival in their fortune.
Asset Monetisation & Debt Reduction
The debt reduction drive of Reliance Group achieved another milestone when recently Axis Bank and Yes Bank decided to remove the red flag classification of the Reliance Capital account, paving the way for the successful monetization of Reliance Capital assets.
Reliance Capital group company, Reliance Home Finance is also in the final stage of its asset monetisation, as Authum Investment and Infrastructure, with a bid value of Rs 2,887 crore has emerged as the successful bidder for its assets. This will reduce the Reliance Capital debt by over Rs 11,000 crore, giving a big boost to the company and its investors.
Reliance Capital has received over 70 bids for its multiple assets that include its general insurance, health insurance, life insurance, and securities business, apart from its private equity investment in companies like Paytm E-commerce and Nafta Innovations.
Reliance Group has the Largest Family of Retail Shareholders
The Reliance Group has the largest family of retail shareholders in India, with around 33 lakh retail shareholders in Reliance Power, 9 lakh in Reliance Infrastructure, and 8 lakh in Reliance Capital.
Nearly 50 lakh retail investors of Reliance Infrastructure, Reliance Power, and Reliance Capital, who have continued faith in the group, have gained from this immense value creation.
Over the last couple of years, while FIIs/ MF exited the group companies, and lenders who had invoked pledged shares have sold the same in the markets, the same had been picked by retail investors who are now reaping the benefits of this wealth creation.
Reliance Infrastructure Ltd.
Reliance Infrastructure is another company from this group that holds great promise. The share price of the company has more than tripled in the last three months. Reliance Infra shares zoomed from Rs 32.95 on March 19, 2021, to Rs 105.75 on June 19 this year. We see certain fundamental changes that will help the company to perform well going ahead. First, it will reap benefit out of its investment in group company Reliance Power. Reliance Infrastructure recently approved the subscription of preferential issue of up to 59.5 crore equity shares and up to 73 crore warrants convertible into an equivalent number of equity shares of Reliance Power by conversion of outstanding debt including interest aggregating up to Rs 1,325 crore.
Subscription of preferential issue of equity shares and warrants by way of conversion of existing debt is not deemed to be a related party transaction, being at arms’ length and in terms of the provisions of Chapter V of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations. Shareholding of Reliance Infra and promoter group in Reliance Power will increase to 25 percent after the issue of equity shares and will further increase to over 38 percent post-conversion of warrants. Reliance Infrastructure has also been significantly reducing its debts in the past few years.
Last month, its board approved raising Rs 550 crore funds from promoters which will be utilised for long-term resources and for general corporate purposes. As a result, Reliance Infrastructure announced that it will raise Rs 550 crore through the issue of 8.88 crore shares at Rs 62 apiece on a preferential basis from promoter entity Risee Infinity and VFSI Investment, an affiliate of Varde Investment Partners LP. It also plans to raise funds through foreign currency convertible bonds of up to 24 percent of the diluted equity whenever the FCCB is issued.
Reliance Infra promoters will invest about Rs 400 crore of this investment, and Varde about Rs 150 crore. Following this, the promoters will hold 23 percent in the company, Varde 7 percent, and the public 70 percent. No doubt this was very refreshing news. It has boosted the image of not only the company but also its promoter. The market participants, in fact, celebrated the news which is reflected in the surge in its share price. Any promoter who increases his stake in his company is always welcomed. It shows his confidence in his venture and assures investors about the bright future. This move, in the long run, will increase the profit-making potential of the company.
Debt Reduction Drive
The company is also in a debt reduction drive. It is in the process of monetising some of its road assets. According to media reports, Cube Highways has shown interest in Reliance Infra’s four road assets viz, DS Toll Road Private Limited, NK Toll Road Private Limited, SU Toll Road Private Limited, in Tamil Nadu, and JR Toll Road Private Limited, in Rajasthan. With a total length of 283 km, all four road assets are under operation with a balance available concession period of up to 12 years. Cube Highways has offered an Enterprise Value of Rs 1,430 crore and the proceeds would result in Reliance Infra’s debt reduction to that extent.
If this deal materialises, this would be the second transaction between Reliance Infra and Cube Highway. In January 2021, Reliance Infrastructure had successfully completed the sale of its 100 percent stake in Delhi-Agra Toll Road to Cube Highways for an enterprise value over Rs 3,600.
Our Take
Considering all the above arguments, even institutional investors who had put it in the list of ‘untouchable companies’ due to the high debt and other reasons and were not ready to touch the stock, may start showing some interest sooner than later. This may further boost the share price performance of the company.
Reliance Power Ltd.
The equity market is always considered to be a leading indicator. Hence, any fundamental change might follow a change in equity price. We saw how the equity market started to move higher last year when we were in the mid of the pandemic. This was followed by record updates in the earning of India Inc for the next two quarters.
Therefore, it is no surprise that the share price of Reliance Power has increased by more than 400 percent in the last year and it is followed by the company’s stellar financial performance. During the last year, Reliance Power grew its earnings per share, moving from a loss to a profit. The company for FY21 posted a consolidated profit of Rs 427 crore against a loss of Rs 4271 crore for the previous financial year (FY20). The quarterly performance has also been quite satisfactory with profit doubling on a sequential basis and operating profit margin reaching multiple quarters high of 54.22 percent.
The result looks like a strong improvement, so we’re not surprised the market likes the growth. Inflection points like this can be a great time to take a closer look at a company and see if it is sustainable. First of all, what is helping such debt-laden companies, in general, is a lower interest rate environment. So in the last one-year interest outgo of the company has declined from Rs 760 crore to Rs 620 crore. This fall in interest rate is a combination of both lower interest rate as well as lowering of debt of the company. This shows the company is aggressively tackling its debt obligation.
In addition to this, the company transferring preferential shares into Reliance Infrastructure has triggered positive sentiment about the company and expecting debt reduction in Reliance Power with the help of Reliance Infrastructure. This will help the company to reduce its debt by Rs 1,325 crore by issuing 59.5 crore equity shares and 73 crore convertible warrants to its parent Reliance Infrastructure and other promoters. It is expected that Reliance Power’s consolidated debt will reduce by Rs 3200 crore in FY22.
The company has also started the export of power equipment from its Samalkot project in Andhra Pradesh to its Bangladesh project, a move that will help the company pare debt of nearly Rs 1,500 crore. Reliance Power has sold Module 1 of the gas-based power equipment, which has a capacity of 750 MW, to the Bangladesh project. The Bangladesh project is being jointly developed by the company along with Japanese energy major JERA. The project has also achieved financial closure for its first phase of 750 MW generation capacity. Reliance Power had imported three modules of gas-based power equipment for its Samalkot project, but the project could not take shape due to the unavailability of gas in the country. Now the company is using this power equipment for its Bangladesh project. The sale of the remaining two modules is expected to generate sufficient funds for wiping out the remaining debt of Rs 1,000 crore, and also providing the company with additional funds.
Looking at these developments, we believe that there is enough juice still left with the company’s shares and it may be a multi-bagger from hereon too.
Reliance Capital Ltd.
Reliance Capital is another company that may see good momentum. This is because recently Axis Bank and Yes Bank decided to remove the red flag classification of the Reliance Capital account, paving the way for the successful monetization of Reliance Capital assets. Besides, the company has received over 70 bids for its multiple assets, which include its general insurance, health insurance, life insurance, and securities business, apart from its private equity investment in companies like Paytm E-commerce and Nafta Innovations.
