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Goodbye good buy

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

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.

The Anil way
Anil's approach to growth is different from Mukesh's in that he has put his eggs in several baskets - unlike RIL, which is one large holding company and houses businesses from petrochemicals to organised retailing.

Anil Ambani: Not all eggs in one basket
Anil Ambani: Not all eggs in one basket
Anil's group companies are promoted separately with little cross-holding and Anil himself does not hold an executive position in any of his major R-ADAG companies. Unlike his brother Mukesh, who is Chairman and Managing Director at RIL, Anil is Non-Executive Chairman at all his group companies. So with R-ADAG an investor has a choice of businesses to invest in - telecom, power, infrastructure, financial services - each housed in a separate company. In RIL, however, an investor who believes in the Reliance Retail story but has no faith, say, in Mukesh's refining prospects has little choice but to buy into all of RIL. Anil has many irons in the fire, but most of them are far from redhot.

The coming four or five years, during which R-ADAG will pump in Rs 200,000 crore, mostly in power and infrastructure, will determine the group's future. A little over half of that amount will be debt - till date, the group has in place Rs 50,000 crore of debt and Rs 15,000 crore of equity. Daiwa's Koshal feels that ADAG will not face any problem raising funds as "being a big group they always enjoy a 100-150 basis point or a 1-1.5 percentage point advantage over many other competitors".

SMC Global's Aggarwal adds that R-ADAG is still suffering from the Reliance Power fiasco when the markets crashed between the time the company's initial public offering closed and the stock got listed. "They have a psychological setback to contend with," says Aggarwal. Yet, what also may be keeping investors away is that other than the rollout of CDMA and GSM infrastructure at RCOM, Anil Ambani has little to show in project execution. As Koshal points out: "People are waiting for performance from R-ADAG. They need to see the cash flows being generated. The company has taken on large projects that have a long gestation period and so the market is waiting. Once the cash flows start the market will start rerating the companies."

R-ADAG executives counter that the company has proved its execution skills with the RCOM rollout. Syed Safawi, CEO Wireless Business, RCOM, says: "We created an unmatched, fully-integrated telecom network spanning 24,000 towns and six lakh Indian villages in less than half the time taken by other leading operators."

There is plenty more in the works. R-ADAG is building three ultra mega power projects under Reliance Power and three metro routes in Delhi and Mumbai under Reliance Infrastructure.

Delhi's metro connection to the airport is all set to be commissioned and is undergoing test runs. Reliance Infrastructure will construct the second phase of the Bandra-Worli sea link in Mumbai, taking it to Haji Ali. The company is also working on 1,000 km of roads. Reliance Infrastructure CEO Lalit Jalan claims that the company has emerged as the largest infrastructure corporation in just three years (its order book is at Rs 60,000 crore - consisting of core infrastructure projects).

The R-ADAG company that has the lowest risk attached to it along with huge opportunities to unlock value is financial services major Reliance Capital. A mutual fund subsidiary has the largest assets under management among all Indian mutual funds companies, at Rs 26,000 crore. The life insurance arm is among the top three life insurance companies in India, and Anil Ambani is exploring the option of listing the company. The group has got the go-ahead to pick up a stake in a commodities exchange, and it is also keen to have its own bank, regulations permitting.

The Ambanis have over the past three-and-a-half decades earned a reputation for big-picture strategies, immaculate execution and reaping economies of scale. It is not often that investors get disillusioned with the Ambani companies. With Mukesh Ambani expected to make the move from Sea Wind to Antilla, it just may be time for a new beginning for the brothers Ambani.