May 11, 1998

By V Shankar Aiyar

One would have thought this of the US, but Dhirubhai H. Ambani was never one for stereotypes, writing the rule book on how business should be done as he went along. "India is a land of opportunity," he said a few years ago. "If you can dream it, you can do it." His sons and business heirs, Mukesh and Anil, have done a can-do act of their own. In a year when many in the corporate world were busy just trying to survive, flagship Reliance Industries (RIL) returned results last week for the year-ended this March that evoke surprise bordering on amazement.

Sales have moved up by 54 per cent to Rs 13,404 crore, its operating profit has risen by 48 per cent to Rs 2,887 crore, net profit climbed by a quarter to Rs 1,653 crore. Each of these numbers is a new landmark in India's private sector history for a single company, in a year when economic slowdown joined hands with the Asian contagion, and prices of petrochemicals products plunged to a record 10-year low. "They have produced results that are both pleasant and puzzling," says V.R. Srinivasan, director, Imperial Finance. "Pleasant because it comes in the wake of a stream of bad news and puzzling simply because we would like to know how they did it."

So how did they? "Globally competitive cost positions, single-minded focus on productivity and efficiency plus conservative financial policies," says Managing Director Anil Ambani. Cutting through managementspeak, it means the company sold aggressively and so increased sales, cut costs and managed their money intelligently.

The process kicked off five years ago and clicked into the mega-growth slot last year. Clearly aware of the world trends -- for instance, the growing move towards substitution of metals with polymers -- the brothers first worked to vertically integrate their petrochemicals business, being in control of virtually every input from the refinery to polyester-blend fabric to the consumer. Next, they benchmarked their produce to the dollar, which meant that they fine-tuned production to match the cost efficiency of the international market. And when the competition came home -- peak import tariff has dropped from 110 per cent to 40 per cent in the past five years -- the brothers set aside lessons learnt at US business schools and took a chapter out of their father's book of rules: spend time with the customer, listen to him, give him the quality he wants at the price he can afford.

Over the past 18 months, the RIL team -- led by vice-Chairman Mukesh, who generally overseas technology and planning, and Anil, who takes care of marketing and finances -- set about rethinking the client base and new growth areas. Step one was planning massive, economic scales of production. At full capacities, production of all its lines, raw material like purified teraphthalic acid, plastic chips, polymers, yarn and fabric, nearly trebled to 5.2 million tonnes a year, anticipating demand. This demand was systematically created by the brothers. Mukesh would personally get involved, Dhirubhai-style, with even end users like plastic chair and bucket makers, and eyeing others in the automobile market, working with them to improve quality, supply, and price.

Better pricing has come from a combination of factors. It ranges from building a captive power plant to bring energy costs to below world levels at its petrochemicals complex in Hazira, near Surat, to controlling inventory. And complementing the steep drop in raw material prices -- because of a drop in import duties -- by borrowing from the domestic and international markets at an average interest of 13 per cent a year when most industry was generally paying at least three percentage points more. At the end of it, RIL increased its market share in all product categories by 13 to 26 per cent, out-performing the industry's growth rate in every case.

Some of it may be a coincidence of long-term goals which have parlayed into short-term fireworks. But it has worked, whatever the criticism, shooting past its already impressive average growth of between 15 and 20 per cent over the past five years. Shareholders aren't complaining either: the EPS, or earnings per share, has jumped from Rs 17.60 last year to Rs 28.70 now.

There is a downside, however, and analysts say it has to do with not being able to perform as well as it could have. Hitesh Bhatia, analyst at First Global, says: "Profits have increased but not their profitability. Basically, they have employed more capital, increased capacity and pushed volumes. The return on incremental capital -- of Rs 9,000 crore -- is not good enough." Some also feel that in some ways, Reliance has lucked out. One analyst feels that the failure of the cotton crop last year led to a quick changeover from cotton to polyester by the weavers, which pushed both demand and prices of polyester. "This sector does not see much imports and it has given them a big boost." There is also some concern about the squeeze in margins and analysts feel the company could see lower returns even if prices rise by 5 to 10 per cent this year.

Indeed, one analyst posed the obvious question to Anil during the course of a cyber-chat recently. The younger Ambani stated quite candidly that "profits are not purely a function of product prices", and are dependant on factors like input-cost management and working-capital management. "In any case, RIL's prices are currently 10 to 15 per cent below import parity price, giving us enough flexibility for future price action. One of the margin-capturing strategies," he typed back, "could be to benchmark polyester prices against cotton prices. If cotton prices were to go up we would have enough flexibility to increase our prices."

At a meeting with financial analysts after announcing results last week, he pitched that worldwide, 10 ongoing petrochemicals projects had been cancelled and over 30 have been put on hold with lenders turning wary. That straightaway translates, says Anil, to less future supply and better future demand in a country which has almost the same number of people as China but consumes only a third of the polyester as that country and buys only a quarter of the plastic. Potential boom time.

As always, RIL is betting on the future. Dhirubhai's calls have been spot on the money. If his sons can keep it up, Reliance's results could evoke another round of surprise -- even envy -- yet again.

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