The Money Culture, Michael Lewis’ 1991 book on the Wall Street excesses of the 1980s, brought into the mainstream a play on words about “OPM” – other people’s money. He mocked the practice of large corporations of using the money of other companies and investors to make leveraged acquisitions. Continents away, an Indian company was being praised for absorbing OPM in its original form: operating profit margin. Reliance Industries Limited (RIL), as created and maintained by founder Dhirubhai Ambani, aimed to implement projects at scale and break even at the operational level as quickly as possible.
Dhirubhai’s son Mukesh stayed true to that plan for his old economy ventures. But for his two new economy companies, Mukesh Ambani turns to Wall Street’s definition of OPM. RIL’s telecoms game Jio has already raised ₹1.52 billion rupees from 13 tech vanguards and featured investors. And now, it looks like RIL is looking for an encore in its retail game, Reliance Retail, too – it sealed a second major capital inflow from investment firm KKR on Wednesday and is reportedly in talks with Amazon as well.
In Ambani’s playbook, that’s a significant departure from the past.
You are not alone at the entrance. A significant deviation from the past will also have to follow at the start. In its 47-year history, RIL has mostly avoided partnerships with large corporations and private equity, partly because it never needed them and partly because it was tight on control. And, on the rare occasions when he hired a partner for a project in India, he was unable to deliver a press-worthy return he is now receiving for the amounts and valuation he is providing.
The company that is now RIL was formed in 1973 and went public in 1977. As the Dhirubhai cult grew, so did the RIL cult of equity among Indian retail investors. In 1987, Reliance Petrochemicals arrived. In 1992, Reliance Polypropylene and Reliance Polyethylene appeared. In 1993, Reliance Petroleum arrived. All offered shares to the public, but none attracted private investors. They all merged into RIL.
It was not until the fifth significant company, RPL, that Ambani added a significant equity partner. In April 2006, US oil company Chevron bought a 5% stake in RPL, with the option of increasing it to 29%. Three years later, Chevron did not exercise that option and left at the same price at which it entered.
In the same decade, RIL also diversified into oil and gas exploration and went on strike in the Krishna-Godavari basin. In 2011, it offloaded 30% to British oil company BP in 23 oil and gas blocks for a total deal value of $ 9 billion. Another 10% was with the Canadian company Niko Resources. Those oil and gas wells did not turn out as projected.
Also, Niko had problems at the parental level. Unable to finance its share of development costs and forced to arbitrate, it sold its stake to RIL and BP for $ 36 million. BP continues to invest, but its return on investment is unknown. What is known is that it canceled $ 790 million of its Indian investments in 2014. And last month, it canceled $ 1.9 billion in assets in Brazil, India and the Gulf of Mexico, but did not release details. Collectively, the RIL partners that have been around for a while haven’t had a bumper exit so far.
However, they continue to do business with RIL. In addition to its investments in oil and gas blocks, this July, BP invested $ 1 billion for 49% in an oil retail joint venture under the Jio-BP brand. Similarly, Chevron and RIL have a joint venture in shale gas in the US.
That is, in a sense, the pull of RIL. It is too big and important for multinationals looking for a presence in India to ignore. This influence (business, political, regulatory) has allowed him to raise ₹1.52,000 crore from Google, Facebook and others in exchange for approximately 33% of their telecommunications company. Other ₹13 billion rupees have entered the retail company of two investors.
Ultimately, all of these partners will judge RIL based on their return on investment. Over the past 10 years, RIL shares have returned a compound annual return of 17%, significantly better than the benchmark BSE Sensex. However, among the 30 components of the index, this was only the fourteenth best. Above RIL is a group of IT service companies, banks and consumer goods companies.
Much of the rise in RIL’s shares was due to investments, with an increase of 71% in the last six months. Embedded in these valuations is the weight of expectations. “… The market is baked with a high EPS [earnings per share] growth, particularly for Jio (35% CAGR sustained for 10 years), “said a recent research report from Edelweiss Securities. A group of private partners will be watching with interest to see if RIL can meet other people’s money.
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