Business Today

December blockbuster

The Ambani brothers love to make announcements around their father’s birth anniversary on December 28. This year, while Mukesh started off the Reliance Petroleum refinery on December 25, Anil announced the GSM launch on December 30.

Suman Layak        Print Edition: January 25, 2009

After some dithering, Reliance Industries’ subsidiary Reliance Petroleum announced the commissioning of its new greenfield refinery at Jamnagar on December 25, meeting the yearend target it had set for itself in 2008. The announcement came after initial reports that the commissioning might happen only in March 2009.

The move was perfectly timed with Dhirubhai Ambani’s birth anniversary on December 28. But it was tokenism more than anything else. For it will take months to get the plant fully running. Only the crude unit has been activated. The Reliance Petroleum press release said that the rest of the secondary units are being synchronised and commissioned. While officials at Reliance Industries refused to come out with a definite date by which all the units will be functioning, sources indicated that it may take a while. In fact, sources said “the crude unit itself will take sometime to stabilise and it will be well into January before processing starts ”.

Meanwhile, with two Reliance refineries at Jamnagar, this little town in Gujarat is already being labelled as the refining hub of the world. Essar’s refinery is also located in the same place. The capacity of the new Reliance Petroleum refinery is 5.8 lakh barrels per day and is the sixthlargest in the world. It includes a 0.9 MTPA polypropylene plant and has been built at a cost of $6 billion. The Reliance group now accounts for 2 per cent of the world’s total refining capacity.

The new refinery, however, comes on stream at probably the most difficult quarter for the group. Standard & Poor’s (S&P’s) changed its outlook on the company to negative from stable. S&P’s credit analyst Mehul Sukkawala said: “Profitability is expected to be adversely affected by lower fuel demand, especially in developed markets.” In a report, S&P has pointed out that the company will face adverse market conditions immediately, but its cash flows may improve once the new refinery starts full-scale operations.

The other issue that will worry Reliance Petroleum is the narrowing difference between the prices of sweet crude and the high-sulphur heavy crude. The company’s ability to process the cheaper, heavier crude allowed it to enjoy a higher refining margin in the past. However, with refiners globally adopting the technology to process heavy crude, the price differential between the two has already decreased to $1.20 a barrel, from as high as $10 a barrel in 2004. The new Jamnagar refinery coming on stream has further buoyed the market for heavy sour crude. The output from Indian refineries fell by 1.1 per cent in November 2008—an indicator of the adverse market conditions. Reliance Industries’ refinery output, too, has fallen. Clearly, all is not well for Reliance and 2009 could be a challenging year for the group.

Mukesh Ambani: Oil’s not well and Anil Ambani: Banking on GSM
Testing times
• New refinery is world’s sixth-largest with capacity of 5.8 lakh barrels per day

• However, RIL’s gross refining margins dropped by $2 in the September ’08 quarter compared to the average for 2007-08

• S&P feels refining margins would decline further by $3 to $4

• S&P revised outlook from stable to negative due to company’s increased debt

Ringing in GSM
• Rs 10,000 crore of investments almost committed

• Will reach 11,000 towns and scale up to 24,000 soon

• Launch used existing towers of Reliance Infratel (set up for the CDMA business)

• Infratel also offering network for other new licensees

• Aggressive plans for nationwide 3G services

On Tuesday, December 30, Anil Ambani announced the nationwide roll-out of GSM services by Reliance Communications (RCom). It was yet another important milestone for the Anil Ambani-promoted company. While it offers CDMA services across the country, its subsidiary Reliance Telecom currently offers GSM telephony services in only three circles: West Bengal, Assam and Gujarat. Now, the junior Ambani intends to use its GSM network to catch up with market leader Bharti Airtel and keep other rivals like Vodafone at bay. GSM services, after all, account for about 75 per cent of India’s 325 million mobile users.

Initially, Reliance Communications will cover 11,000 towns and 3,40,000 villages with its GSM operations. It has completed most of the capital spending on the second network and has already spent Rs 10,000 crore ($2.1 billion). At a press conference in Reliance Centre in Mumbai, Ambani said: “With the combined offering of GSM and CDMA we will be aiming to become India’s #1 network and serve one billion Indians.” Ambani also announced that Reliance Communications will be bidding for 3G spectrum on both GSM and CDMA platforms and would want to be a nationwide operator for both.

Angel Broking’s analyst Harit Shah feels the entry of Reliance in GSM services is only good news for subscribers. “Competition always helps,” he says. The brokerage has put a buy on this scrip with a target price of Rs 450.

For Anil Ambani himself, things have come full circle. In 1997, Reliance Telecom, the initial telecom venture by the unified Reliance group, began operations on the GSM platform under the stewardship of Anil Ambani himself. Later, in 2000, Mukesh Ambani took over the mantle of Reliance Communications and preferred CDMA—it was then known as the poor man’s mobile service with limited mobility. Subsequently, Anil took a backseat in the telecom business until the Reliance empire was carved up between the brothers. And today, he has led the business back to GSM technology.

The tariff plans announced on January 4 for the GSM foray attempt to outdo the popular 501 scheme (Monsoon Hungama) that the company had offered under his brother Mukesh’s leadership. The GSM customers have been offered SIM card for as little as Rs 25. A plan called customer experience programme has been launched that allows Rs 900 worth of talk time to the customer for free over 90 days—at Rs 10 per day. The plan promises almost 100 per cent freebies for any customer willing to spend Rs 300 a month. It also comes with free unlimited calling at night within the Reliance Network and free unlimited calls for Mumbai customers within their state and Goa. Many of these are ‘first of its kind in India’ plans. One will just need to wait and see how competitors and consumers respond.

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