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| May 1, 2000 | ||
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| RELIANCE
INDUSTRIES Bottom Line Bonanza The petrochemical giant stuns the market with a net profit of Rs 2,403 crore, the highest by a private company in India By V.Shankar Aiyar
For good reason. RIL rose above hi-decibel tech tantrums to clock an astounding Rs 2,403 crore net profit for 1999-2000 -- the highest ever in India's private sector. In fact, RIL tops the private sector in sales, assets and net worth too. But profits are eloquent. Its cash profit rose from Rs 1,642 crore five years ago to Rs 3,738 crore (an average Rs 10.41 crore per day) in 1999-2000. As of this year, its net profit would be higher than the sum of the net profits of market-cap toppers Hindustan Lever, Infosys, Wipro, Zee and Satyam. More significant than numbers is the environment. In a period (1995-2000) wracked by change in tariffs, the Asian contagion, political instability, demand recession and highest ever crude prices, RIL profits almost doubled (see graphics). How does Reliance achieve such a scorching pace? What is the key? "The untapped Indian opportunity," rasps Ambani, almost mocking the question. Cryptic clues need translation. Segment RIL's 8.9 mtpa output and it is basically polyester and plastics. The polyester segment grew at 14 per cent (compounded annual growth rate) over the past five years. Ergo, RIL, with a 47 per cent market share, was bound to benefit. But growth is not just organic. An analyst with a leading FII points out that "RIL has successfully sought and created new markets both through product innovation and pricing strategies". In fact, value addition is market share strategy. Through product innovation, RIL not only brings value to the market, but it also prevents parvenus from entering the segment as the cost of hi-tech innovation is high. Simultaneously, RIL uses efficiency, capacity and deep pockets to deliver the product to the consumer assuring quality and affordability. Such is its dominance that very few of the 39 other polyester producers in the country can boast of profits. Now consider plastics. India's growth is powered by the agricultural economy and the demand push in branded consumer goods. RIL is a force in both segments. It is the largest supplier of PVC pipes for irrigation and has a marked presence in the newly opened sector of foodgrains packaging. Move on to branded goods -- consumer electronics, automobiles, FMCG and telecom. RIL supplies polypropylene and polyethylene for use in electronic goods, automobiles, soft drink crates, mineral water bottles, packaging material for foods and ducting for telecom cables. With a 56 per cent market share in this segment, RIL is way ahead of any other competitor. Indeed, by clothing people and products it has virtually ridden the Indian tiger's growth -- or in Ambani's words "the Indian opportunity". It has not been an easy ride though. In the past five years, tariffs have been changed, import duties have been lowered from 65 per cent in 1995 to an average of 30 per cent and the markets opened. Under the WTO, Indian consumers can import every product that RIL makes so the competition is truly global. Add managing price fluctuations. The period has seen petrochemical product prices crash to 20-year lows in 1996 only to rise by nearly 50 per cent and the price of crude -- a critical input -- rise from $10 (Rs 430) a barrel last year to $32.75 (Rs 1,408) in January 2000. RIL though has not just managed risks but benefited from them. R. Kannan, managing director, Imperial Finance, puts it in perspective: "Being a capital intensive and cyclical business, financial management is critical to RIL. What is worthy of praise is that from a high-risk taker in '80s, RIL has now matured into a great risk-manager. The debt-equity ratio is less than one, exchange risk is under control, gross profits cover interest outgo eight times while total debt can be repaid with two years operating profits plus cash on hand." The maturing is widely recognised. Says Shankar Sharma, director, First Global Finance: "They are talking the right language now. Low capital expenditure and high cash flows. They should outperform the other cyclicals in the market." There is little to quibble about in this five-year performance. Some analysts have found fault with the pricing of the buyback. RIL's response: "We believe it is more important to provide a bottom cap to protect 1.2 million small investors rather than pander to the speculators' fancies." The Ambanis do face a critical challenge though. RIL's stupendous performance (and the potential of its investments in telecom, oil and gas exploration and the refinery) has not translated into the scrip's price. RIL analysts value the scrip at Rs 600 but the market hasn't quite obliged. It is an issue the Ambanis are sensitive to. It isn't an easy task for a company with 22 million shareholders and an equity of Rs 1,054 crore. They could take hope from the scrip's rise in a falling market, the buyback and from the 70 per cent premium for their GDR. But it would take more to translate performance into pricing. For a lasting effect, the Ambanis -- the original authors of the Indian equity cult -- may have to write a new one. Perhaps the buyback was the first chapter. |
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Anil
Ambani is known to be obsessively meticulous. At the annual post-results
analysts meet on April 19, the managing director of Reliance Industries Ltd
(RIL) prefaced his presentation to the pashas of the financial market --
from Nimish Kampani to the new bull Ketan Parikh -- with a remark that it
would last between 40 and 45 minutes "depending on the pace". The
70-slide presentation lasted 43 minutes. It would have been easy to mistake
the applause for his exactitude rather than for the astounding results. The
stock market though made no mistake. On the morning of April 20, virtually
every scrip on the Sensex hit the lower circuit barring one: RIL. The stock
raced from Rs 315 to Rs 340 by the end of the day.