Business Today

Goodbye good buy

The brothers Ambani who have been an investor's delight for decades have lost the plot - for now.

Suman Layak        Print Edition: Nov 14, 2010

The rumours about Mukesh Ambani's opulent new residence cum-office on Altamount Road in south Mumbai, called Antilla, could make for a bestselling compilation.

The story about the Ambanis engaging a team of priests to rid the place of ghosts was intriguing. And the yarn that his flagship Reliance Industries Ltd, or RIL, had acquired a 14 per cent stake in East India Hotels - which runs The Oberoi and Trident hotels - to avail of the company's services to train the staff at Antilla was simply outrageous.

But, then again, with RIL's lacklustre show on The Street, Ambaniwatchers are preferring to spend time consuming trivia. RIL has underperformed the benchmark Sensex on the Bombay Stock Exchange by roughly 36 per cent since July 2009 till last fortnight, and is clearly not the index bellwether for the time being (see Playing Catch-up). The scenario is not much better for younger brother Anil's Reliance-Anil Dhirubhai Ambani Group, or R-ADAG. His companies have lost a little over 16 per cent in value in the BT 500 for 2010 over their combined value a year ago. The biggest losers: Reliance Communications, or RCOM, which has dropped 38 per cent over the previous year's study; and Reliance Natural Resources has plunged 36 per cent. With the brothers having stopped their public bickering, this has been a quiet period in more than one way.

RIL is currently navigating the trough of the refining cycle with gross refining margins down to $6.6 per barrel from $12.2 in 2009. This alone will create a strain on its cash flows at a time when it has drawn up aggressive plans to grow. The company also committed almost $6 billion (Rs 27,000 crore) for broadband wireless access and a shale gas venture in the United States where it has made a couple of acquisitions.

Ratings agency Standard & Poor's has termed RIL's ambitious strategy a "weakness" in a recent report. Brokerage house Elara Capital in an early October report recommended investors to "reduce" their holdings in RIL. Subhash Chand Aggarwal, Managing Director of brokerage house SMC Global, says: "The sale of RIL's treasury stocks at every high has increased the floating stock of Reliance and is one reason for the scrip not participating in the current rally. They have to sell more treasury stock to meet their investment commitments."

Treasury stocks are RIL shares that accrued to the company when group companies were merged into it. The value realised so far via these sales is estimated at Rs 9,330 crore.

In the BT 500, which considers the average market value between April and September, RIL has gained just seven per cent over a year ago. The corresponding gain for the 30-share Sensex is 17 per cent. A recent Credit Suisse report reckons that if all the money invested in RIL's 94 subsidiaries was to be invested in fixed-income instruments, the earnings per share of the company would have gone up by 11 per cent. But for Mukesh it is not just about returns but about sweating assets for growth. That upside, though, has yet to play out. Says Brijesh Koshal, Managing Director, Daiwa Capital Markets India: "RIL will need large triggers - its floating stock is so huge - to move up." RIL officials refused to comment when contacted by BT.

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