Ambani Needs to Expand to Boost Reliance Stock
Chairman of Reliance Industries Mukesh Ambani. Photographer: Adam Berry/Bloomberg
Billionaire Mukesh Ambani’s Reliance Industries Ltd., India’s largest company by market value, must tap the country’s hunger for power and communications to boost the stock that has lagged behind key benchmarks, investors say.
The oil refiner and energy explorer has climbed 4.5 percent in Mumbai in the past year compared with a 21 percent gain in India’s Sensitive Index and a 13 percent advance in the MSCI Asia Pacific Energy Index. Investors shied away from the shares as a global recession curbed fuel demand and Mukesh clashed with his younger brother, Anil Ambani, over their business interests.
A decision on May 23 by the world’s richest brothers to scrap a non-competition accord removed curbs imposed after they split India’s second-biggest business empire. Reliance on June 11 acquired an Internet services company for $1 billion and fund manager Deven Choksey says more initiatives may be outlined by Mukesh in his annual speech to shareholders tomorrow.
“Now there is clarity about them getting into new sectors and investors look forward to the next phase of growth,” said Choksey, chief executive officer of Mumbai-based KR Choksey Shares & Securities, which manages about $123 million for wealthy individuals and owns Reliance shares. “I expect Mukesh Ambani to lay out the road map for new businesses such as telecom and power,” he said in a telephone interview.
Family Agreements
Under an agreement reached on June 18, 2005, Mukesh, 53, kept the petrochemicals, oil and gas units and Anil, 51, got the power, telecommunications, financial services and entertainment units. The brothers said last month they were scrapping an accord drawn up in 2006 that barred them from expanding into each other’s businesses.
On the fifth anniversary of the split, the billionaires may signal a formal reconciliation, with Anil likely to attend tomorrow’s meeting of Reliance Industries shareholders, the Hindustan Times reported today, citing an unidentified person close to the family. Manoj Warrier, a spokesman for Reliance Industries, declined to comment on the report and Anil Ambani didn’t immediately respond to an e-mail seeking comments.
Reliance, which accounts for about 14 percent of the benchmark index, rose 1.3 percent to close at 1,071.40 in Mumbai. The stock has lagged behind the Sensex in four of the 10 years ended June 15, according to Bloomberg data.
The Mumbai-based company’s first foray in commercial electricity generation may come as early as next month when Reliance plans to bid in a government auction to build at least one power plant in India, two company officials said yesterday.
Power Plant Bid
India, Asia’s second-fastest growing major economy, ranks below war-ravaged Ivory Coast, Honduras and Sri Lanka for the quality of its energy, transport and telecommunications infrastructure, according to the World Economic Forum’s Global Competitiveness Index. Prime Minister Manmohan Singh on March 23 asked companies to fund half the country’s planned $1 trillion infrastructure spending for the five years starting April 2012.
“India will remain one of the fastest growing economies and it will remain a big market,” said Juergen Maier, who helps manage the equivalent of $1.4 billion of assets, including Reliance shares, at Raiffeisen Capital Management in Vienna. Investing in power production will help Reliance Industries generate more cash, he said in a telephone interview.
The operator of the world’s biggest refining complex and India’s largest natural gas field had outstanding debt of about 625 billion rupees ($13.4 billion) and cash and equivalents of 218.7 billion rupees as of March 31, the company said in April. Reliance is in talks with banks to borrow $1 billion, two people with direct knowledge of the matter said June 4.
Cyclical Businesses
The company’s net income missed analysts’ estimates in at least three of the last four quarters after profit from turning crude oil into fuels slumped as the worst recession since World War II cut global demand for gasoline and diesel.
“Refining and petrochemicals are cyclical businesses that have their ups and downs,” said Philipp Lotter, a Singapore- based analyst at Moody’s Investors Service. “If Reliance were to broaden out into more stable sectors that would stabilize their overall business.”
Moody’s on June 14 affirmed its Baa2 debt rating for Reliance, with stable outlook, following its acquisition of Infotel Broadband Services Ltd. three days earlier. The ranking is second lowest investment grade awarded by the rating company.
Even as Mukesh Ambani diversifies his business, investors expect Reliance to continue to buy oil and gas assets overseas and fulfill its ambition of becoming a global energy company.
Overseas Acquisitions
The company bought shale gas assets in the U.S. from Atlas Energy Inc. for $1.7 billion in April after failing to purchase LyondellBasell Industries AF in a deal that would have valued the bankrupt chemicals maker at $14.5 billion, and losing a bid for oil sands assets in Canada owned by Value Creations Inc.
Reliance is considering buying a stake in shale gas assets owned by Pioneer Natural Resources Co. in the U.S., two people with knowledge of the matter said June 10.
“They can become a significant global player and there is nothing to hold them back,” said Seth Freeman, chief executive officer at San Francisco-based EM Capital Management LLC, which owns Reliance shares. “They have the financial wherewithal to do that and energy would be the way they expand overseas.”
To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.
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