The RELIANCE Bubble

As the Sensex moved past 18000, the Ambanis crossed another milestone – that of the richest family on earth. The combined wealth of Mukesh and Anils now over $90 billion, more than the net worth of Walton family – promoters of Wal-Mart. Now consider this, only 53 countries had GDP of over $90 billion in 2006 as per World Bank data!Reliance Industries, Mukesh’s flagship, is the best performing large-cap index stock anywhere in the world this year by a wide margin. The stock has been on a relentless up-move, triggered by speculation on pricing of natural gas from its KG Basin fields and expectations of fast expanding retail operations. The gas pricing has now been finalized and it is a fair deal to Reliance. High crude oil prices will ensure record refining margins
at its refinery and the petrochemicals businesses are also doing very well.

But, do all these factors – many of them known even earlier – warrant a more than doubling of the stock price? Reliance’s much talked about retail rollout is slowing down as the company is facing resistance in many states.

Given the uncertain political scenario at the centre and possibility of an early election, it is unlikely that state governments will move in favour of the company – though it has every right to receive protection from violent protestors.

Even if the company manages to expand its network, using the famous Reliance ability to work the system, how profitable are these stores going to be – given the rush of new players into retail and prohibitive propertycosts? The small neighborhood I live in already has seven modern branded retail stores on one street, including a Reliance Fresh! It is doubtful if anyone other than the landlords are going to make any money out of the retail revolution anytime soon.

Reliance Petroleum, the latest jewel in Mukesh’s crown, now boasts of a market capitalization of close to Rs78,000 crore. This is for a company, which is setting up an oil refinery and may start operations in another two years if all goes well. Many things can go wrong in between; the US economy may cool off further, which will lower fuel demand and bring down prices.

Margins are already under pressure despite record crude oil prices, though Reliance Petroleum will enjoy higher than industry margins by processing heavier crude oil. The US dollar may weaken further, making exports of refined products less lucrative. Domestic demand is not rising fast enough to absorb the possible surplus capacity.

RPL’s market value of Rs78,000 crore seems even more incredible when the total project cost of the refinery is Rs27,000 crore! So, even when the project is at the implementation stage, the company is enjoying a value of nearly thrice the total cost. Once the refinery becomes operational, imagine the future value it must generate to justify these valuations!

To put it in another way, RPL’s current valuation is nearly two-thirds of Infosys. That much wealth was created without even 5 per cent of the effort Murthy, Nilekani and thousands of Infosys employees put in over the last 25 years to make Infosys what it is today. Reminds you of website valuations in the late ’90s? Wait until you hear about the miracles that the Anil Ambani Group stocks have performed.

Not to be outpaced, Anil Ambani has also taken a leaf out of big brother Mukesh’s ‘wealth creation strategy’. If Mukesh can generate so much wealth just by taking a new project public, why can’t Anil? So, he decided to take hive off the big power projects from Reliance Energy and announced the creation of Reliance Power. How much capacity is Reliance Power going to build? The sky is the limit it seems, as the company has announced plans for 12 projects with an aggregate capacity of more than 24,000 MW. That is more than the existing capacity of NTPC, the biggest power generation company in the business now. Impressive, indeed.

What else can Reliance Power do? There is some market talk of huge cement plants, which will use the fly ash from its own power plants as raw material. Some reports suggest that the potential capacity may be more than the existing capacity of the entire cement industry in the country. Even more impressive! Where will the company sell all that cement? Please don’t ask such dumb questions!

But how profitable are these projects likely to be? Reliance Power’s flagship project will be the 4,000 MW ultra-mega power project at Sasan, which by the way is its only project that can be implemented anytime soon.

This project was awarded to Reliance Energy after the earlier awardee, Lanco-Globeleq, was disqualified. The tariff quoted by Reliance is Rs1.2 per unit, which must be among the lowest anywhere in the world. When the project was awarded to Lanco, many doubted whether the project would ever be profitable at such low tariffs. Now that the project is with Reliance, the markets have no doubt it will be a money-spinner.

All the troubles Reliance Energy continues to face on its 7,500 MW Dadri project in Uttar Pradesh have also been overlooked. Even nearly two years after announcing the project, it is still not clear if the company has completed its land acquisition. It does not help that the current Uttar Pradesh government is sending not very supportive signals over the project because of Anil Ambani’s political interests. Nothing much has been heard about a similarly ambitious project proposed in Orissa, announced last year.

When the Reliance Energy stock was moving on all these fantastic news flows, came the announcement that the company would develop a huge township in Andhra Pradesh. The centrepiece of this township is to be a 100-story high-rise, the tallest in the country – no less. And the stock jumped another 12 per cent!

All these stories of fantastic valuations pale in comparison to Reliance Natural Resources or RNRL. Here is a company that was originally supposed to buy natural gas from Reliance Industries and supply it to various Reliance Energy projects. In other words nothing more than a gas trader.

Then markets started to see infinite possibilities for the company in the entire energy space – from exploring for oil and coal bed methane to city gas distribution. The company won three or four coal bed methane blocks in Rajasthan and a small oil block in Mizoram in the last round of NELP bidding.

These are all exploration blocks, mind you, and RNRL has to drill and find something under the ground. But the RNRL stock has behaved as if the company is already sitting on huge oil and gas reserves.

RNRL now boasts a market capitalisation of around Rs13,500 crore. Incredible as it may sound, the last leg of the surge came after the company applied for a licence – just an application that might have cost a few thousand rupees – for city gas distribution. That news pushed up its market value by around Rs3,000 crore in a single day. Indraprastha Gas, the leading city gas distributor in the country with a monopoly in Delhi and now expanding to other cities, has a market value of just Rs1,900 crore!!