Relying on Mukesh
RIL is expected to continue on its aggressive growth path, and set new benchmarks

(column by R. Prasad & Devdeep)

When it comes to Indians and food, the word “Fresh” has a universal appeal, and smoothly supersedes every credible constriction construed under the sun. If it has to be eaten, by simple logic, ‘fresh’ is how the Indians love it.

As Reliance Industries Limited (RIL) finally got off with its gargantuan retail foray in the financial year 2006-07 with a food retail chain named Reliance Fresh, a powerful connection was established for the incorrigible ‘freshness conscious’ Indian at the outset. A connection that is pan- Indian, just the way Mukesh Ambani plans to make Reliance Fresh a household name across India (RIL currently has 138 Reliance Fresh stores in place), which is, in turn, a stepping stone to his becoming the Indian version of Wal-Mart. The company has also launched its foray into consumer electronics with Reliance Digital.

Grandiose is how Mukesh Ambani envisions every one of his old and new ventures, and lately he’s been quite preoccupied with setting up new behemoths that should one day be living examples on their own. And with the kind of numbers RIL shows up on its balance sheet, one wouldn’t dare to doubt Mukesh’s exuberance as evident from his investments, as the financial year 2006-07 proved yet again.

Despite facing volatility in the prices of crude oil, an unexpected incident at the Jamnagar plant, production loss owing to floods at the Hazira unit, Reliance Industries came out triumphant by creating a new chapter when its net profits crossed Rs.100 billion mark, exports that surpassed $15.02 billion and a turnover that stands at $25.51 billion. Mukesh Ambani, CMD, Reliance Industries, while speaking on the announcement of his company’s results sounded ecstatic, “2006 – 07 has also been an eventful year for the company. While our petrochemicals & refining business recorded its best ever performance, we have made substantial investments in our future growth engines such as E&P and retail...” As on June 7, 2007, the RIL scrip closed at Rs.1669.15, pole-vaulting by over 100% year on year. On May 28, Mukesh’s personal valuation in RIL made him the first trillionaire of India.

The juggernaut rolls on...
Mukesh has ensured that RIL continues to lead in three critical benchmarks of excellence – raise money from the market at cheaper rates than the competition, complete all outstanding projects on schedule and dictate the pricing mechanism in every segment they enter. The Jamnagar unit in Gujarat, with a capability of 33 MMTPA is the biggest green field project across the orb, bringing together a complex plant that has a captive power incorporated with petrochemicals. With the expansion processes being undertaken on a major scale, Reliance Petroleum should start functioning in full capacity by the month of December next year. The sheer size & scale of this project should make Jamnagar the next big refining destination of the globe and in the process, also ensure that RIL further strengthens its overwhelming price leadership in the petrochemicals arena. The company is also setting up an acrylic monomer complex with a capacity of 200,000 TPA in an MoU with US-based Rohm & Haas. There were also rumours of an attempt to form a JV with Dow Chemicals, which did not ultimately see the light of day.

Meanwhile, the merger with Indian Petrochemical Corporation Limited (IPCL) has come at an opportune time, and further gives a boost to Mukesh’s long standing integration strategy. RIL accomplished the merger without paying any cash, by a 5:1 share swap ratio with IPCL. RIL’s share capital has increased to Rs.14.53 billion after the merger. RIL will stand to benefit from IPCL’s strengths in commodity polymers. IPCL owns three petrochemical complexes in India. With assistance from RIL, IPCL’s financial performance has been on a steady incline, with revenues increasing from Rs.55.3 billion in FY 2001-02 to a whopping Rs.123.62 billion in FY 2005- 06, and net profi t increasing from Rs.1.07 billion in FY 2001-02 to Rs.11.64 billion in FY 2005-06 (a CAGR of 82%). Stated Mukesh on the merger agreement with IPCL, “This merger will create value through synergies and scale that shall enhance the sustainable competitive advantages of RIL... (the merger) shall provide shareholders of IPCL an opportunity to participate in RIL’s diversified business portfolio.”

Every single avenue explored by Mukesh Ambani has managed to create an impression not just at the bourses but on the country’s flourishing economy as well. With revenues that touch 3% of the nation’s GDP and close to 5% capitalization of the entire market put together, Reliance Industries is today a behemoth born out of Dhirubhai’s dreams and carried forward by Mukesh’s market might. While the IPCL acquisition has made RIL a dominant entity in the petrochemicals domain, it also dominates fibre intermediates, polymers & polyesters. Reliance’s strategy in its oil & gas business has been to vertically integrate in this sector. It has thirty four blocks for exploration awarded under NELP by the government, exploration in countries like East Timor, Oman & Yemen, rights for production & exploration and 30% interest at Tapti & Panna-Mukta fields. RIL’s exploration portfolio got a boost with 18,500 square kilometers being added up from the sedimentary basin in the country. The company also made four fresh discoveries (one at NEC25 and three at the KGD6 block) in the last few months. An analyst at India Infoline points out, “KGD6 will commence operations by H2, FY09 and with huge finds at CBM & NEC, the contribution of E&P segment to both revenue and profits will surge significantly.” Furthermore, reports reveal that the actual gas reserves at the KG basin are around three times the known existing reserves, which means the boost to RIL’s bottomlines will be tremendous. The company is in the process of building pipelines that would market the gases that are explored in the KG basin and an investment of Rs.60 billion has been put in place for the same.

Thriving on challenges….
While analysts are quite impressed with Reliance’s stellar performance on a consistent basis, they are quite cautiously optimistic about the sustainability of the company’s performance. States Raj Gandhi, “Reliance is undertaking too many projects at the same time. The execution of these projects may become a headache for Reliance in the long term. And with Reliance venturing into myriad businesses, they also give rise to newer challenges. States Anshukant Taneja, Analyst, Standard & Poor’s (which rates RIL as stable with respect to its financial obligations, but susceptible to changing economic conditions), “The ratings remain constrained by RIL’s exposure to highly cyclical industries, large capital commitments in refining & petrochemicals business and uncertainty in developing its reportedly large gas reserves.

Add to that the myriad investment plans in new capital intensive ventures like retail, SEZs (where the company is lining up investments of around Rs.400 billion)and life sciences. Take the instance of retail, where the company has committed investments of Rs.250 billion and is now expanding to other retail formats like consumer durables (Reliance Digital), FMCG, healthcare & apparel. Bijay Sahoo; President & Chief People Officer of Reliance Retail, mentions while speaking exclusively to B&E on how they plan to handle the emerging situation in the sector, “Our plan is to build the supply side of the talent. We have done the need analysis and are working on the development plan; in this country we have a lot of raw talent and we need to transform that talent... the industry has limited availability...”

Sahoo’s statements gain more weightage if one were to glance at the figures given by KSA Technopak that extrapolate how organised retail would grow at a CAGR of 28-32% from this year till 2020 and scale 35-40% of consumer spending in retail in our country. With the industry growing in such proportions, the need for skilled labour would also increase. Statistics ascertain that by the year 2020, the threat of a debilitating talent crunch now looks very real. Under such circumstances, Bijay Sahoo gives an insight on how Reliance Retail views the problem, “You need specialisation and also you need people who can perform generalist kind of roles. We focus on specialisation and are also nurturing people to be leaders who can be multiple specialists in their team and can deliver the general management goals.”

Under such a scenario, Bijay Sahoo feels that building a strong Employment Value Proposition (EVP) is of paramount importance as it would generate attractiveness in the employment market & augment commitment & productivity of the workforce. The only way to ensure a perennial supply of talented workforce would be to follow the talent transformation approach, which stresses on bringing in freshers with the correct skill sets & attitude and develop them into strong retail experts by offering high quality inputs in the retail arena. Moreover, one has to account for the entry of Wal-Mart into India in a JV with the Bharti Group. One can certainly expect more such foreign giants to gain the much coveted India entry soon. They would definitely push the acquisition costs of skilled manpower in the retail sector further upwards, just like IBM, HP & Accenture have done in the Indian IT sector.

Nevertheless, one cannot deny that Reliance has thrived on challenges ever since the era of Dhirubhai Ambani. The company has always envisioned larger achievements for itself than what was thought possible, even if that meant taking substantial risks.

As they always say, “Nothing ventured, nothing gained.” And when you are RIL, setting up new businesses and making them profitable and industry benchmarks becomes a habit. Unless there is some really dramatic downturn, one can well expect Reliance to continue to a chart a stellar growth path that would see it dominate the rest of the clan in all segments of operation with effortless ease. The ideas remains the same... walk the talk and make the others follow…

(End of R. Prasad & Devdeep column)