Reliance Is Looking a Lot Less Reliable

Can the ailing founder's two sons rule as a team?

On June 24, Dhirubhai Ambani, the 69-year-old chairman of energy giant Reliance Industries Ltd., suffered a cerebral stroke, lost consciousness, and lay near death in a Bombay hospital. The news shook India's cozy business circles and rattled the local market. By the end of the day, Reliance stock, which accounts for 16% of the Bombay stock exchange index, had dropped 3.5%. National television broadcast half-hour updates on Ambani's condition. And India's most powerful people--politicians, industrialists, and movie stars--braved a monsoon downpour to descend on the hospital where Ambani's family kept vigil.

It is hard to imagine Reliance without Dhirubhai Ambani. The teacher's son from Gujarat state built his sprawling empire from scratch, bringing to bear formidable entrepreneurial talents, a gift for building connections to lofty personages, and, it is said, a willingness to bend the rules when necessary. In the process, Ambani created a giant with interests in everything from petrochemicals to telecom to textiles. Last year, Reliance group posted profits of $940 million on revenues of $12.2 billion. "Dhirubhai Ambani dreamt big, made his shareholders millionaires, and is the inspiration of so many young Indians," says Gita Piramal, the author of Business Maharajas, a best-selling book on Indian tycoons.

In short, Ambani will not be easy to replace. The patriarch's two sons, Mukesh and Anil, have been running the day-to-day operations since the early 1990s. But Reliance faces several challenges. A late entrant to the telecom industry, the group must spend billions rolling out its fixed and mobile services. It must merge with its other operations a formerly state-owned petrochemical company acquired in May. And, of course, the brothers must work together. Recently, rumors have swirled that Mukesh, 45, and Anil, 43, haven't seen eye-to-eye on some strategic decisions, including the telecom venture. They are under enormous pressure to maintain profit growth and continuity, because Reliance is not only a darling of Indian shareholders but also a top play for foreign fund managers.

Under Mukesh, the group vice-chairman, and Anil, the managing director of most of the businesses, Reliance has become an increasingly professional operation. Unlike their father, who surrounded himself with loyalists, the brothers have hired professional managers to run the companies. "Reliance has gone beyond Dhirubhai Ambani," says Shankar Sharma, director of Bombay investment bank First Global. "His illness will have an emotional effect on the company, but no strategic long-term impact."

Still, the difficulties are mounting. While Reliance's acquisition of state-held Indian PetroChemicals Ltd. provided the Ambanis with an instant near-monopoly in the business, it also saddled the group with a flabby and inefficient dinosaur that needs to be imbued with the entrepreneurial Reliance culture. Indeed, the $303 million purchase has earned mixed reviews from analysts. Some say IPCL is surviving only thanks to high tariff protection on imported plastics, which account for 70% of the company's turnover. Moreover, critics say Reliance's market dominance in petrochemicals won't significantly boost profits because the former state company can't make its products cheaply enough.

At the same time, some investors are fretting about Reliance's ambitious $5 billion foray into the telecom and tech business. "The market is concerned that there's not enough clarity from the company on that project," says Ullal Bhat, who manages $400 million in four India funds for JF Asset Management Ltd. and owns Reliance stock. Finally, Reliance needs to build out a network of gas stations to take advantage of its huge capacity in petroleum products.

But the deepest concern of investors is whether the brothers will continue to play as a team or split up. Ambani Senior has been the patriarch who glues the family and empire together. Without him, the influence that Reliance commands in the corridors of power in New Delhi will surely diminish. So investors hope that the Ambani magic will prevail. If it doesn't, Reliance may not remain the united family of which its founder dreamed.

By Manjeet Kripalani in Bombay

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