Date: 11th July 2000
Rely(ance) at all levels
Current market price - Rs374.5
BSE Sensex - 4898

Its quiz time folks. Name the old economy stock that is sought by marketmen even today, in this day and age of momentum stocks? No! It has built up global scale capacities in most products that it manufactures. No, once more! Final clue: It has built up the largest investor base and has been consistently rewarding investors. For those who haven't guessed yet, the answer is Reliance Industries - a company that has made reliability its hallmark.

What is the Business?
Reliance has its fingers in many pies. While the fist is tightly wrapped around petrochemicals, the tentacles extend into other areas. Reliance has built global capacities in operations. Even in the face of doomsayers who predicted curtains for it in the wake of controversies and "uncalled for" expansions when petrochemicals were on the slide, Reliance has managed to prove its mettle and come out with flying colors. "Think BIG" is the motto of Reliance and each project can be compared to those undertaken by global giants. It has promoted the world's single-largest grassroots refinery project with a capacity of 27mtpa. By bidding for BSES, it will further consolidate its hold on the power sector. Its holding in L&T gives Reliance a stranglehold in core areas. Its recent foray into broadband, telecom, optic fiber cables et al gives it the cloak of a new economy stock too.

Who is the Management?
This is a quintessential 'rags to riches story'. Long has Reliance been identified with one man who symbolizes the opportunities that were presented to him, and who managed to grab all of them. The man in question - Dhirajlal Hirachand Ambani, popularly known as Dhirubhai Ambani. Folklore has it - and if you visit Mulji Jetha Market or the MJ Market in Mumbai, many a textile trader will repeat it - that the man started his career as a small time trader, living out of a small cubbyhole alongwith his large family in Dadar. Moving to Aden in Yemen to make money, he got back to India and set up the first plant in the seventies. From that day, there has been no looking back. Dhirubhai is responsible for introducing the equity cult in India and his debenture series created a record of sorts, and also created the largest investor base in the country. The Reliance saga is too big to be told in brief. As his projects are, Dhirubhai's story too needs a large canvas. Today, ably assisted by his sons - Mukesh and Anil - and professional managers, he is looking at making professionalism Reliance's hallmark. This was not the case a few years back. After having thrived in the halcyon days of 'license raj' and being involved in high profile spats with the likes of Ramnath Goenka and Nusli Wadia to name a couple or the unseemly controversy of the share switch case with UTI, the company is trying very hard to assume the position of a role model.

Whither Cash flows?
Would you call Reliance's investments as meaningless diversifications? There is a saying in the Army - "The distance between the teeth and the tail should not be too long", for once this happens the war is likely to be lost. In Reliance's case, even though it has gone in for aggressive expansion plans and is also looking out for acquisitions, the risk managers of the company have managed to infuse bundles of cash for the teeth to continue biting. They will have to continue doing a good job. For, Reliance is getting into quite a few areas, which makes many an analyst feel queasy. The strength of its money managers lies in the fact that they have always managed to raise cheap funds abroad. The strong rating assigned to the company by international agencies, which is a notch below the sovereign ranking assigned to India, helps in this task. Also, the diversifications are being undertaken by subsidiary companies of Reliance, wherein stake may be offered to strategic partners or the Indian public. A listing on NYSE, in the offing, will also help it to raise cash for these ventures at a cheaper rate. As far its existing streams of business are concerned, Reliance has completed all major capex plans and free cash generation are expected to remain strong.

Why should I Buy?
Colossal, gigantic, albatross and such like synonyms come to mind when describing Reliance. Is this hyperbole? Nah! The clout enjoyed by Reliance is huge. Size apart, the reach and play on margins achieved by BIG numbers have been proved by Reliance time and again. With the petrochemical cycle moving upward, realizations and margins are expected to have a profound impact on the financials. The forays into newer areas will also boost margins tremendously when they get going. Reliance's track record proves that these projects should take off and start generating revenues soon. Given its free cash generation, inorganic growth could also be high up on the agenda of the company. The present state of the industry is such that existing players are finding it difficult to survive. By buying them out or entering into a strategic partnership with them, Reliance can increase its volumes. Thus, even if the prices fall, Reliance can leverage its capacity to show a rise in financial numbers. And look at the players lining up at Reliance's doors wooing it.

Where can I go Wrong?
The biggest concern about Reliance is that volume glut in fiber, intermediates and other petrochemical products may see margins squeezing. While it has managed to stay ahead in the race of expanding volumes to get the better of margin squeeze, the polyglut may take a toll. The volumes will rise but gross margins will fall, as oversupply forces Reliance to export, where price realizations are low. The newly commissioned PX capacity will drive Reliance's volume growth in intermediates. But PX margins are far lower than other products because of lower import duty and a higher proportion of low-margin exports. Rising polyester prices will only neutralize the negative impact of the duty cut in the Budget.

Murali Iyer

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