Mukesh Ambani’s AGM speeches indicate a trail of forgotten promises and projects that have not ended up as envisaged
Three-and-a-half-years later, the theme of Ambani’s speech at the company’s 37th AGM sounded familiar – ‘Contours of a new wave of growth’. But the response from the market and shareholders was muted this time, probably because while RIL had grown since then and delivered a few masterstrokes such as signing up with BP for a natural gas exploration and marketing deal that would bring at least $7.2 billion, and may be as much as $20 billion, the company has suffered on many fronts.
Take for example, Ambani’s promise in 2007 that crude and gas production from KG-D6 fields would touch 550,000 barrels of oil equivalent per day. With a production capacity of 80 million standard cubic meters per day, two other gas fields — D1 and D3 — were touted as India’s largest and most complex deepwater gas production facility. Four years later, the company is nowhere near that figure. The confusion got compounded when, in March this year, RIL and the Directorate General of Hydrocarbons issued contradictory statements on the quantum of gas likely to be produced from the company’s 18 wells in the KG basin in 2011-12 and 2012-13.
In 2011, the company produced 8 million barrels of crude from its KG basin and 720 bcf of gas — both were far below the expectations of the Street.
In his 2007 speech, Ambani had offered shareholders a glimpse of where they would find RIL in the next five years. But the journey hasn’t been as smooth as the chairman wanted to project. True, RIL has made three shale gas acquisitions in the US, at a combined investment of $3.9 billion, but that has been overshadowed by the company’s failure to succeed in its most aggressive acquisition bid yet, when the company’s $14.5-billion offer to buy bankrupt petrochemicals maker LyondellBasell was rejected.
Over the last two years, the theme has thus changed to “partnerships” in domestic businesses rather than control of overseas assets, a shining example of which is the deal with BP.
| PROMISE VS PERFORMANCE |
| BUSINESS SEGMENT: OIL AND GAS Major Announcements: In 2008, Mukesh Ambani announces crude and gas production from KG-D6 fields. Says two major deepwater fields have a combined peak capacity of 550,000 barrels of oil equivalent. With production capacity of 80 million standard cubic meters per day, D1 and D3 gas fields are declared the largest deepwater gas production facility Current Status: Producing 50 mmscmd of gas from the so-called prolific wells. Production slated to fall to 43 mscmd in 2012-13. Company sells 30 per cent stake in 23 oil and gas blocks including D6 for $7.2 billion. |
| GLOBAL AMBITIONS Major Announcements: In his 2007, AGM speech, Ambani announced major plans to expand international footprint in oil exploration. Current Status: In 2010, RIL enters unconventional energy business of shale gasin the US. Acquires three shale gas assets for $3.5 billion. Enters into 40 per cent partnership with Atlas Energy for the shale gas business. But this company has now been acquired by Chevron. RIL has also acquired 45% interest in Pioneer Natural Resources Company. Manages to acquire 60 per cent interest in Carrizo Oil and Gas. However, the company’s bid to acquire Lyondellbassell for $14.5 bn was rejected in March 2010. |
| BUSINESS SEGMENT: POWER Major Announcements: Last year, Ambani announced transformational initiatives in power, after the non-compete agreement between ADAG and RIL ended. Ambani said the company was ready to participate in the entire chain from generation, transmission and distribution. Current Status: The 2011 AGM speech has no mention of the power plans. Company officials say the plans have been shelved |
| BUSINESS SEGMENT: ORGANISED RETAIL Major Announcements: In 2006, RIL had announced plans to build a retail network with deep linkages in rural India and spoke of investing Rs 25,000 crore in the business over the years. The company planned to be in retail verticals like food, FMCG, consumer durables, home essentials, farm equipment, distribution of travel and financial services, health and wellbeing products and services, besides educational products. Current Status: Reliance has over 1,000 stores across 86 cities, compared to nearly 1,150 in 2010. Has also been rolling out stores through its partnership with global brands like Marks and Spencer, Apple, Zegna, Paul & Shark, Diesel, etc. Revenues of Reliance Fresh and Reliance Hypermart were Rs 3,132 crore, while the total losses were Rs 351 crore in 2010-11, The company wants to get into the cash-and-carry business. |
| BUSINESS SEGMENT: SEZ Major Announcements: Mega plans to develop industrial enclaves in Haryana and Raigad in Maharashtra. The Haryana SEZs was expected to require an investment of Rs 25,000 crore and have provisions for a cargo airport and a 2,000-Mw power plant. Current Status: The Maha Mumbai SEZ has been scrapped. The Haryana SEZ will commence work this year, according to a press statement released by the company last week. And the company’s other SEZ at Raigad in Maharashtra has run into trouble over the rehabilitation and resettlement package announced. |
| BUSINESS SEGMENT: BROADBAND Major Announcements: Last year, the company announced acquisition of Infotel Broadband to create a nationwide network of next-generation wireless broadband services. Infotel emerged successful bidder in all the 22 circles of BSW auction conducted by DoT. Current Status: The company is currently in the process of conceptualising products and services. |
The scene is not much better in the petrochemical and refining businesses, which suffered badly the world over during the years of the global economic slowdown. RIL, which reported gross refining margins, or GRMs, of $15.5 a barrel for the quarter ended March 2008, saw its GRMs slip to as low as $6 for the quarter ended December 2009. Since then, those have gradually inched up and stood at $9.2 a barrel for the quarter ended March 2011. But the numbers are still far from the peak levels of $15-16. GRMs indicate the margins a company earns on processing a barrel of crude oil into refined petroleum products like petrol and diesel.
Though analysts believe that the underperformance of the commodity business would reverse, the declining profitability has disappointed the markets. It is not surprising that RIL’s Return on Capital Employed and Return on Equity have fallen consistently since 2006-07 (See table).
Also Read
These ratios are near their lowest levels in the last 10 years. For the stock, the chart clearly shows that it has languished and underperformed broader markets in the last two years.
The weak business environment apart, the company has also been investing huge sums in new businesses like organised retail (still loss-making) and telecom (over Rs 5,000 crore invested in a broadband company), which are not generating any returns currently.
In his 2007 speech, Ambani also laid out a grand plan for retail. He did the same in his latest speech as well. But the track record has been patchy. RIL had forayed into the retail business in 2006, and since then the company has seen one slowdown and several changes in the company’s strategy and management. The initial idea was to create plays on the domestic consumption theme. The plans were ambitious, as the company wanted to be present in the entire value chain of retailing — from grocery, apparel and entertainment to consumer durables and footwear, among many other segments.
RIL’s FY11 report card shows that the company’s retail plans have hit the slow lane. Reliance Fresh, its arm in the food retailing super market format, clocked revenues of Rs 2,513 crore for the full year, while Reliance Hypermart posted revenues of Rs 619 crore. Reliance Retail’s total loss stood at Rs 351 crore during the year.
Ambani had recently said RIL had emerged the largest food retailer in the country. This was promptly contested by Future Group founder Kishore Biyani, who runs Food Bazaar, Big Bazaar and KB’s Fairprice, among other retail format stores.
Reliance now has over 1,000 stores across 86 cities, compared to nearly 1,150 stores in 2010. But where the company has scored is in its partnerships with global brands like Marks and Spencer, Apple, Zegna, Paul & Shark, and Diesel.
One of the major reasons for the market’s disappointment this year has been Ambani’s silence on his “transformational initiatives” for power at last year’s AGM. He had spoken about RIL’s readiness to participate in the entire chain – generation, transmission and distribution. While Ambani didn’t say anything, one of the company officials later said that the company had shelved its power plans for some time.
All eyes are now on Ambani’s other dream, which he talked about in this year’s AGM: His initiatives in broadband wireless access. Ambani returns to this business less than a decade after he shook up the mobile telephone market with its CDMA-based service, a business that went to younger brother Anil Ambani in a fractious family settlement six years ago. The elder brother has clearly indicated that he wants to usher in fourth-generation (4G) communication technologies to seed a data-rich services market, even as the entire telecom industry is grappling with the third-generation, or 3G, service rollouts.
Though there was no mention of the rollout plan in his speech, everyone is waiting for Ambani’s moves. For, in his first brush with mobile telephony in 2002, he launched a national rollout overnight and promised cheap mobile calls, creating a virtual frenzy in the market. Will history repeat itself?