Why Reliance May Need To Get More Dependable

Even viewed from an approaching helicopter, Reliance Industries Ltd.'s petrochemical complex in the western-India state of Gujarat looks enormous. On one side of the 1,000-acre site, huge gray plants dominate the expanse of marshy land surrounding them. On the other side rise skeletons of plants under construction. Around them, 18,000 laborers toil, some toting bricks on their heads, others welding steel beams as part of this $2 billion expansion. "It's one of the largest investments in the world," brags Hital Meswani, executive director of Reliance.

Bombay-based Reliance likes to boast about its size. It comes across in all aspects of the company: revenues, market share, and ambition. Since India's economic liberalization policy took effect four years ago, Reliance has emerged as the country's largest private-sector company. And it plans on getting even bigger: The Gujarat project will help make Reliance the world's eighth-largest polyester producer and among the biggest makers of key petrochemicals. Reliance is also diversifying into oil refineries and telecommunications.

NEGATIVE PERCEPTION. But Reliance's high profile may have made it too aloof. Long unpopular with other Indian industrialists, management has recently run afoul of its shareholders. Alarmed by surprise moves to raise equity, behind-the-scenes merger activity, and rumors of duplicate share issues, investors have driven Reliance stock down nearly 40% in the past 12 months (charts). During the same period, Reliance's global depositary receipts--India's first--have dropped from $30 a share to less than $17. Critics say stockholders have good reason to be annoyed, and if they get fed up enough, they could make it tough for the company to finance its ambitious plans.

The latest scandal to rock Reliance stock came in mid-October, when rumors began floating that the company had issued millions of dollars worth of duplicate shares--illegal in India except under specific circumstances, as when original share certificates are lost. Concerned that they might get caught with worthless stock, investors sold off shares, driving down Reliance's already sagging share price by a further 8%. In response, Reliance said on Oct. 20 that it had issued 400,000 duplicate shares over the last few years, amounting to 0.09% of equity, but that the company had complied with Indian regulations in issuing the extra stock.

Then Reliance formally requested an investigation of its stock-price plunge by the Securities & Exchange Board of India, charging an "evil coterie" of brokers with carrying out a "systematic campaign" against the company. Few investors seem inclined to take Reliance's side. They believe there may be millions of duplicate shares on the market--and that Reliance may have broken the rules in issuing them. Says one institutional investor: "The perception of Reliance management is negative."

The duplicate stock problem brings back bad memories of just a year ago, when Reliance made two sudden moves that unhappy investors say diluted equity. In October, 1994, it launched a $300 million private placement with several government-owned financial institutions. Investors felt misled: Several weeks before the placement was announced, foreign investors had met with 36-year-old Anil Ambani, Reliance's managing director, in New York. Attendees claim they were told no new equity would be issued, which Reliance denies. Shortly after the private placement, Reliance merged two subsidiaries into the parent company, which investors also complained diluted the value of their holdings.

UNLIKELY INDUSTRIALIST. Although a new chorus of criticism is rising now, Reliance earlier managed to silence detractors by putting together an impressive string of successes. When India began opening its markets in 1991, many thought the company would collapse under pressure from much larger global competitors such as DuPont Co. and Hoechst Corp. Instead, Reliance's revenues have grown 137%, to $2.2 billion, since the fiscal year that ended Mar. 31, 1992. Net profit has grown more than five times, to $338 million. And profit margins have reached 15%, compared with 5% in 1992. "The reforms have been the biggest catalyst for growth for Reliance," says Ambani.

Reliance was started in 1966 by Anil's father, Dhirubhai H. Ambani. The son of a Gujarati schoolteacher, Dhirubhai was an unlikely industrialist--most of India's big business houses emerged from a long line of wealthy traders. After eight years working in Yemen, in part as a gas station attendant, Ambani returned to India and began trading and exporting textile fibers. He started Reliance with four knitting machines.

Despite Ambani's modest beginnings, he quickly became adept at doing business in socialist-style India. The company cozied up to the ruling Congress Party and perfected the art of getting the necessary government approvals to build its factories. In the process, Reliance also became one of the most resented companies in India; competitors began to complain about Reliance's hardball tactics.

Now 61, Dhirubhai spends just a few hours a day in the office. Day-to-day affairs are run by his two sons, Anil and Mukesh, 38. Both were educated in the U.S.--Anil at the Wharton School, Mukesh at Stanford University. Anil says he never wanted to do anything but join his father's company; hours after he completed his MBA exams, he was on a plane back to India. A few days later, he was in the office.

The family's determination explains in part why many shareholders still stick with Reliance, despite the rough treatment. They also like its $1 billion-a-year expansion plans. The Gujarat project will be largely completed in September, 1996, and should start contributing to cash flows. Other plans include a $3 billion investment in an oil refinery and deals to build power plants, which will help supply its petrochemical plants. That investment will be nearly $2 billion. Reliance is closer to the source in its energy strategy by going into oil and gas production off the coast of the Arabian Sea to feed its oil refinery and power plants.

CELLULAR BID. Reliance's attempts to enter new businesses have also been applauded--in part because of its tightfisted approach. For example, Reliance in July bid on 20 of the 21 telephone operating regions being opened to private companies. Most analysts had expected the company to bid high to get the biggest operating areas, such as Delhi. Instead, Reliance bid relatively low and came in first for several smaller areas. The company's bid for the state of Madhya Pradesh, for example, was $10 million, while Delhi went for nearly $5 billion. Considering how cheap the license bid was, the company stands to turn a tidy profit, analysts say. They're also bullish on its entry into cellular telecommunications. In recent weeks, the company was awarded seven regions for cellular services.

Yet Reliance remains dogged with image problems. Deepak Parekh, chairman of the Housing Development Finance Corp. in Bombay, says the company has improved its corporate profile in many ways, but still doesn't participate in foreign delegations or in business associations. And others point out that in contrast to India's other big industrial families--the Tatas and Birlas, who have built hospitals, temples, and schools--Reliance does little in the way of philanthropy. Anil Ambani defends his policy, arguing that "creating jobs and assets" is certainly philanthropic.

Many believe that the impact of the Ambanis' mistakes on their wallets will influence their behavior. A year ago, their 26% controlling interest in Reliance was worth $1.5 billion. Now it's worth $865 million. That certainly doesn't match the family's quest for bigness.

Before it's here, it's on the Bloomberg Terminal.