Business Today

An Empire Shaken

Anil Ambani's Reliance Group is going through one of its toughest times. Can it survive the debt bomb?
twitter-logo Nevin John   New Delhi     Print Edition: March 24, 2019
An Empire Shaken
Anil Ambani (Photograph by Rachit Goswami)

Everyone in the business circles of Mumbai - and other metros as well - seems to have an opinion on Anil Ambani's current predicament and his fall from being one of the richest men in the world 10 years ago to one who is hanging on to his billionaire status by a mere thread. Most rivals say he was over ambitious. Only a few seem to speak up in his favour saying that at least some of his companies went down because the entire sectors were in trouble.

Reliance Communications (RCom), his telecom company, wants to go for voluntary bankruptcy to settle with debtors. The power business has a slew of unfinished projects and has had to sell some lucrative assets to reduce debt. The Supreme Court has pulled him up for not repaying the money RCom owes to operational creditor Ericsson, and has said he will have to spend time behind bars if he does not pay Rs 550 crore by the third week of March. His defence company, Reliance Naval and Engineering, which he bought from Nikhil Gandhi, is reeling under debt, as is his infrastructure venture.

Only the financial company - Reliance Capital (RCap) - is doing well, though it, too, has lost opportunities while peers such as Bajaj Finance, Shriram Capital and Capital First (now merged with IDBI Bank) gained substantially in the past few years.

In 2008, a survey estimated him to be the 6th richest man in the world with a wealth in excess of $42 billion. Currently, his wealth as promoter of seven listed companies is valued around Rs 13,742 crore - a shade under $2 billion at current exchange rates. But if the pledged shares are taken into account, his current net worth would be around Rs 8,000 crore, even as the share prices of most of his companies are falling. He has dropped in the Forbes list to below number 50 in India, and below the top 100 in the world. Meanwhile, his group's aggregate debt has gone up to Rs 1.72 lakh crore in March 2018, while the telecom businesses made heavy losses last year.

Anil Ambani's detractors are happy to talk, but off the record. His Reliance group has filed 28 defamation cases against politicians, media and writers, and 16 of these claimed aggregate damages of Rs 80,500 crore, news portal Scroll.in reported in November last year. He has also sued Edelweiss for selling his pledged shares which caused his companies' share values to plunge. And these are only the recent ones.

In the past, he has taken Mukesh Ambani to court over the division of their father's empire, and many others for myriad reasons. In 2008, he sued Mukesh Ambani for Rs 10,000 crore separately for remarks made in an interview with The New York Times against him, but withdrew it after two years. Last year, Reliance Infra issued a Rs 5,440 crore arbitration notice against Pipavav Defence founder promoters Nikhil Gandhi and Bhavesh Gandhi and their companies "for breach of warranties". In the Rafale corruption allegations, he has filed cases against politicians from opposition parties, media organisations and journalists.

Anil Ambani and his companies don't like talking to the press. Multiple efforts to get answers from his various companies have failed. Corporate communication managers in all his companies stonewall all enquiries or attempts at meetings with senior executives.

What went wrong in just a decade for a businessman who, even his detractors admit, is an astute financial brain and a great deal maker?

In hindsight, the problem had started with the messy battle for division of the Reliance empire after Dhiburbhai's demise. Before this, Anil Ambani was seen talking to investors to raise debt, and was also the main person the press interacted with. The textile business also reported to him. Mukesh Ambani was the quieter one, an engineer with a reputation for being a details man, and who handled operations and the petrochemical and refinery businesses. He also started the telecom business. The two brothers seemed to complement each other.

After the bitter fight, Dhirubhai's empire was finally divided in 2005, into two, almost even, halves. Mukesh Ambani retained petrochemical, textile and refinery and oil and gas businesses. Anil Ambani got the future growth businesses - telecom, power, infrastructure and finance. They also signed a no-compete pact.

Immediately after the division, both brothers went on an expansion mode. Mukesh Ambani got into the retail business. While these were not considered sunrise sectors in the 2000s, they showed profits and cash. By 2012, despite having taken heavy debt for expansion, Mukesh Ambani's empire was net debt-free. He was also burning money in Reliance Retail to win market share and drive rivals into losses.

Meanwhile, Anil Ambani was drawing up mega plans. He had ambitions to be the biggest player in telecom, power and infrastructure and even entertainment. "He was jumping from one business to another. There were shortcomings in execution. In many projects, the cost was more than anticipated and those fetched no return," says Amit Tandon, Founder and Managing Director, Institutional Investors Advisor Services (IIAS).

Power Cut

In 2008, Reliance Power raised a record Rs 11,563 crore from an IPO with the stated intention of setting up 13 gas, coal and hydro power projects of 28,200 megawatt (MW). The biggest of these was supposed to be the Dadri gas fired power project of 7,480 MW, which would get gas at concessional rates from Mukesh Ambani's KG-D6 gas fields.

As it turned out, the gas did not come. Gas prices are regulated by the government of India, and Mukesh Ambani said that he could not sell gas at the price agreed to in the family settlement, $2.34 per million British thermal unit (mBtu) for 17 years, because government prices were at $4.2 per mBtu. A legal battle ensued, with the Supreme Court finally ruling that a family agreement could not take precedence over government policy and gas pricing. The Dadri project never took off.

Anil Ambani miscalculated in coal as well. In mid-last year, RPower sold the special purpose vehicle (SPV) formed to execute the Tilaiya ultra mega power project (UMPP), which it had won in 2009 at a record low tariff of Rs 1.77 per unit, to Jharkhand Urja Vikas Nigam for Rs 112 crore. It also wrote to the Andhra Pradesh government for pulling out from the Krishnapatnam UMPP citing it was unviable. Both were imported coal based projects. (In 2012, laws changed in Indonesia, making coal from there expensive.)

Another power project to meet the same fate was the 3,960 MW Chitrangi plant. The company had planned to source coal from captive mines allocated to the Sasan UMPP. Tata Power went to the court against plans for using the surplus coal. In 2014, the Supreme Court ordered that the coal from the mines attached to UMPPs cannot be diverted to other projects. Last year, Uttar Pradesh Power Corporation (UPPCL) cancelled the Chitrangi project and seized RPower's bank guarantee of Rs 74 crore.

While these could be honest miscalculations, there were other problems, too. Many projects for which he had raised debt ran into cost and time overruns. According to a report by Exim Bank, the Sasan project cost had overrun by $1.45 billion, which was financed with additional equity and debt from other lenders.

RPower's website, however, says that the Krishnapatnam and Chitrangi projects are under implementation, and that two gas-based projects are under implementation, besides a slew of hydro projects.

Though many of its projects didn't take off, RPower's debt has risen to Rs 31,700 crore from Rs 500 crore 10 years ago. The company paid Rs 2,925.97 crore as interest in the last financial year, the second biggest cost after the fuel cost of Rs 3,985.2 crore. The consolidated profit of the company fell 6.28 per cent to Rs 1,034.81 crore in the last financial year, while net sales dipped 5.34 per cent to Rs 9,839.82 crore.

After 11 years of the mega IPO, the company's website says it has "close to 6,000 MW of operational power generation assets", including the 3,960 MW Sasan UMPP.

Telecom Tangle

On January 10, 2008, RCom sent out messages on mobile phones of customers and journalists to announce what it considered was one of its biggest achievements. The company's scrip, which listed at Rs 307 on March 6, 2006, had touched Rs 844.70 that day, taking its market capitalisation to an all-time high of Rs 1,65,917 crore. Cut to February 2019: RCom's share price is Rs 5-6 on most days, almost equal to the face value of the share (Rs 5).

Over the past few years, Anil Ambani has been using all his deal-making skills to stave off the inevitable. But now even he wants the RCom mess to be sorted out through the National Company Law Tribunal (NCLT) going for voluntary bankruptcy.

RCom's troubles are not all of its own making. Mukesh Ambani, who had initially set up the company, had chosen CDMA technology against the GSM that all other users had gone for, and announced rock bottom rates to gain market share and subscribers. But unlike Jio, which is a subsidiary of the cash rich Reliance Industries, Reliance Infocom (earlier name of RCom) under Anil Ambani was a standalone company, with too much debt and poor quality customers.

"RCom took a royalty-ridden rich man's technology and made it a poor man's offering. Deployment of CDMA-based networks was costlier than GSM? It was doomed," says Jayath Kolla, Partner and Founder at tech research firm Convergence Catalyst. RCom's ARPU (average revenue per user) of Rs 80 was always less than the industry average of Rs 120. "So on every unit, the company made a loss and kept scaling up the loss as more subscribers were added," he says.

In 2008, when RCom received spectrum under the government's dual technology regime, it was too late. Its debt pile had already reached Rs 25,000 crore and new licences to Uninor, Aircel and other operators had fuelled competition. "They (RCom) always tried to change the policies instead of focusing on growing the business," says B.K. Syngal, former CMD, VSNL (now Tata Communications). Syngal should know, because he was briefly Chairman of Reliance Telecom when Mukesh Ambani was starting the telecom business in 1998, but he resigned two years later.

His critics say one reason was that Anil Ambani did not give the kind of attention that telecom needed. Then, in 2008, new licences were handed out by the then telecom minister A. Raja, which led to hyper competition in the market. RCom spiralled downwards quickly. With falling call rates, its revenues declined and its debt grew to Rs 45,000 crore by 2016.

When the telecom ministry came under scrutiny for irregularities in handing out licences, several licensees found themselves in trouble with the court.

At one time, rumours were that Mukesh Ambani would bail the companies out. Indeed, the non-compete clause was removed, but this proved detrimental for RCom. Mukesh Ambani launched Jio, and most of the weaker telecom operators went under. Even Airtel is now under pressure, as is the Vodafone-Idea combo. RCom didn't stand a chance. Anil Ambani tried to bulk up with a deal with Aircel but did not get regulatory approval in time.

On February 2, RCom informed the stock exchanges that it has decided to file for bankruptcy through the NCLT after failing to sell assets to pay up debt. It had tried to sell its tower business, and the land in Mumbai and Delhi. It had also announced a Rs 23,000 crore deal with Reliance Jio in December 2017, but had completed the sale of media convergence nodes and fibre for Rs 5,000 crore.

The spectrum sale got stuck after DoT sought bank guarantees. The Supreme Court had cleared the sale of spectrum on the condition that the seller furnish Rs 1,400 crore as corporate guarantee to the government. Finally, the deal fell through. According to sources, Mukesh Ambani's firm refused to take responsibility of paying RCom's past liabilities, including the spectrum usage charges payable to the government.

Infrastructure Mishaps

Power and telecom are extremely challenging sectors. But Anil Ambani ventured into these and many others - cement, defence, infrastructure (airport, shipyard, roads and sea link, real estate and metro rail), media and entertainment. Aggressive bidding won him many projects; he even raised funds easily, but execution became an issue, and disputes erupted.

In 2015, there were reports that the Maharashtra government would initiate the process of taking back five airports - Latur, Osmanabad, Nanded, Yavatmal and Baramati - awarded to Reliance Airport Development in August 2009, because of lack of progress. However, the projects are still showing up on the company's website.

Reliance Cement was floated in 2008 as a subsidiary of Reliance Infrastructure. It created an integrated cement capacity of 5.08 million tonnes at Maihar (Madhya Pradesh) and Kundanganj (Uttar Pradesh), and a grinding unit of 0.5 MTPA at Butiburi (Maharashtra). As per a 2008 news reports, the company made an outlay of about Rs 10,000 crore for this investment. When debt mounting, Reliance Infra decided to sell the cement business. In 2016, Birla Corporation acquired it for an enterprise valuation of about Rs 4,800 crore.

Similarly, Reliance Infra sold off the power plant at Dahanu in Maharashtra, power transmission networks in the state, and retail power distribution business in Mumbai suburbs to Adani Group's Adani Transmission (ATL) for around Rs 18,800 crore. After the sell-offs, Reliance Infra's debt dropped 65 per cent to Rs 7,000 crore. It went to sell the road projects to reduce debt further. The company's road portfolio has 11 projects of 968 km, built at an estimated cost of Rs 11,430 crore. At present, there are buyers for the 180-km, six-lane road that connects Delhi with Agra on National Highway 2.

The group also backed out from the Airport Express metro project in Delhi, alleging that Delhi Metro Rail Corp. (DMRC) had failed to cure certain defects in the civil structure of the project, which "severely impaired the performance". Reliance Infra operates the only operational metro rail in Mumbai, which connects Versova-Andheri-Ghatkopar, and was built at an estimated cost of Rs 4,321 crore. R Infra's engineering and construction business had an order book of Rs 28,500 crore in September. It also has a power distribution business in Delhi.

Real Estate and Defence

Anil Ambani announced a 100-storey project in Hyderabad in 2007. Real estate was about to thrive across the country at that time. Industry experts thought that he would create a company like DLF or Jaypee, since he had experience in mobilising resources and lobbying with landowners. Ambani sought for more concession on land price, but the state government rejected his request in 2016, and the project never took off.

Defence was a completely unknown territory. In March 2015, Anil Ambani bought into Pipavav Defence - which had the licence to make small warships - when the shipyard was struggling to pay off its creditors a debt of Rs 7,000 crore. The acquired entity failed to handle the debt. It owed over Rs 10,700 crore to over two dozen banks, mostly state-run, led by the troubled IDBI Bank, which took the company to NCLT for bankruptcy proceedings in September last year. Another infrastructure lender, IFCI, filed a similar application in November 2017. None of the petitions are admitted yet, legal sources say.

The defence company, which has a market valuation of Rs 732 crore, posted consolidated net sales of Rs 378.5 crore in the March 2018 financial year and a loss of Rs 1,011.97 crore.

The Rafale offset deal was one big hope for the group in the defence business. Reliance Infra, the holding company of the defence businesses, said in its 2016/17 annual report that "the JV company (with Dassault) will be a key player in the execution of offset obligation, including the entire life cycle performance based logistics for the 36 fighter aircraft; valued at about Rs 30,000 crore. This is a part of the purchase agreement between the Indian and French Governments," the report said. The contoversy is raging now that Congress claims it was a sweetheart deal when the Prime Minister went for a government to government deal, replacing the old negotiations in which public sector HAL ws suppose to build most of the Rafales in India. Instead the new deal had an offset clause which saw Dassault, the makers of Rafale, tie up with Anil Ambani for part of the offset contract.

It is not clear now what Reliance will get from the deal or even whether the Rs 30,000 crore is correct. Meanwhile, the defence company remains mired in debt. The company didn't respond to queries from Business Today.

Entertainment - A Sad Tale

Another business Anil Ambani dabbled in and which was not successful is entertainment. The former CEO of one of the entertainment companies under Reliance Entertainment says Anil Ambani's vision was to create an end-to-end entertainment conglomerate, but was a "confused soul". He alleges that while Anil Ambani hired top notch professionals, he did not give them a free hand, and instead often took all sorts of decisions himself. This former business head claims that Anil Ambani decided to pay Rs 40 crore for a sequel of the Hindi film, Karz, from T-Series, because he had liked the original. without taking anyone's advice. The film earned a revenue of six-odd crore. Ambani's team refused to talk to BT.

The strategy in broadcast was also contradictory. He started the business with an aim of creating a film channel and also building a network of channels. Reliance Entertainment had applied for licences of 20 new channels, but none of them saw the light of the day. "The management was told that the promoter didn't have money and, hence, they would prefer a JV with a foreign partner and that's how the deals with CBS and RTL happened," claims the former member of the Reliance Entertainment team. The company did launch a couple of English entertainment channels with CBS and RTL, but these were eventually dissolved and the Reliance TV channels were converted into Bhojpuri general entertainment channels in which Zee Entertainment bought in 2016. Zee also picked up a 49 per cent stake in the company's only profitable business, Big FM.

Other entertainment bets - the DTH operation, Big TV, gaming company Zapak, Adlabs as well as Big Adda - were all written off. "They also invested in a film studio in Mumbai's Film City, which was a strategic misadventure," says independent film-maker and author, Ashish Kaul. But the studio business is finally showing signs of revival. The studio delivered hits with blockbusters such as Golmaal Again and Simba. "Here again, (Anil) Ambani never listened to his professional CEOs. Right from distribution to making music to owning the radio rights, Ambani wanted to own it all. He didn't believe in co-producing; he would acquire films at huge costs and never made money. Now the company has largely limited itself to financing films. They enter into agreements with film production houses, take a percentage of the IP (intellectual property) of the film, and finance it. This model has helped them break even," claims a former executive in the entertainment business.

The Sole Hope

Financial services is the one business that is doing well. Reliance Capital (RCap) had Rs 4.8 lakh crore of asset under management (AUM) as in December 2018. Of this, the asset management joint venture, Reliance Nippon Life Asset Management (RNLAM), contributes the major share of Rs 4.1 lakh crore. The commercial finance business has an AUM of Rs 17,260 crore and Reliance Home Finance has an AUM of Rs 18,290 crore. Besides, they have businesses in insurance, asset reconstruction, broking and commodities and wealth management. The commercial finance business and Reliance Home Finance have AUMs of Rs 17,260 crore and Rs 18,290 crore, respectively.

At a market value of Rs 12,145 crore, RNLAM, which listed in 2017, is the largest in the group. Reliance Capital and Nippon hold 42.88 per cent stake each in the company. RHFL is another listed company with Rs 1,456 crore valuation in the market.

Anil Ambani had plans to build a bank under RCap and wanted to list it by 2017. While addressing a shareholders' meet of RCap in 2013, he had said the bank would help lower RCap's debt to one-fourth and would be listed as a separate entity in three years. No announcements came after that. RCap is now valued at Rs 4,138 crore on the BSE, lower than the peak of Rs 70,240 crore in January 2008.

Though RCap is doing better than the other group companies, it failed in sensing the growth opportunities in financial services."It did not innovate and reduce financial liabilities, failed to suitably expand its portfolio and cross-sell products, and struggled to catch up with changing technology," says an analyst. Reliance Capital is operationally headed by his son Jai Anmol, who is an executive director. His second son, Jai Anshul, recently joined the group as management trainee.

Anil Ambani is known to be a fighter, but he will have to strike the best deals of his life if his businesses have to regain even half the size they had in the heydays.

With inputs from Ajita Shashidhar, Rashmi Pratap and PB Jayakumar.

@nevinjl

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