Will Reliance venture into Telecom Sector? If yes, how much will it be Justified?
The annual report of Reliance Industries points out that the company has pared its debt burden by about 15.5% to the tune of around Rs.12382 crore of unsecured loans in 2009-10, on the back of revenue inflow from newly commissioned 580,000 barrels a day refinery at Jamnagar and KG-D6 block gas proceeds.
The private sector giant holds a cash balance of Rs.19421 crore and its net debt were at less than 21 months of cash flow.
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Under such circumstances, the only option for the company would be to either return a portion of the money to the shareholders in the form of dividends or phasing out its remaining debt over next 2-3 years of time frame.
However, since Reliance’s debt-equity ratio is not unsustainably high, the best strategy for the company would be to create more value for the buck of shareholders by venturing into newer projects and businesses.
Where is the twist in the tale? Until now, Reliance Industries was bound by the non-compete agreement with Anil Ambani related with venturing into various industries where ADAG Group companies already had their presence. The scrapping of this non-compete agreement has opened the floodgates for Reliance to plough its huge cash reserves in various other business sectors.
Where to Plough the Cash Reserves?
There is a wide array of speculation among the media as to where would Mukesh Ambani plough these huge cash proceeds. What’s the reason of this speculation?
The reason being, unlike the acquisitions carried out by other companies, the humungous cash reserves of Reliance are big enough to swallow any medium sized company and thus register its entry into new business line irrespective of the entry barriers for that industry.
One such media speculation is Reliance could be eyeing to buy a majority stake in JM Financial Asset Management, thus registering its entry into the attractive fund management sector.
According to one another media speculation, Mukesh Ambani led Reliance may now want to re-enter the depressed sector of telecommunications. And, that the diversified conglomerate Reliance may well be eyeing a buy-out of third-largest GSM service operator Idea Cellular, which holds 15% market share in India.
Will Mukesh Ambani Enter Telecom Sector?
Mukesh Ambani was actively involved in setting up of Reliance Infocomm (now Reliance Communications), before the de-merger of the Reliance empire. However, post de-merger the telecom business came under the fold of Anil Ambani-led ADAG Group.
Now, here is an important development. According to a report, sources close to Reliance Industries said that the company already has a partially laid out optical fiber cable (OFC) built for captive purposes, but could be ramped up for offering broadband services and transmission of entertainment services.
Is it justified for Reliance Industries to enter Telecom sector?
Probably yes. The valuations in the telecom industry are lowest at this point in time on the back of ultra-competitive price wars between the telcos. Given the way forward is consolidation in the sector; the fundamentals may gradually improve in the years to come.
For a company like Reliance, enjoying comforts of constantly generating cash from its oil and gas businesses, it would be worthwhile to enter the telecom sector at this juncture, preferably through a buy-out of a mid-sized firm like Idea or Videocon’s telecom business. Idea Cellular has been among the winners for 11 key circles at the recently concluded 3G spectrum auctions.
With the licenses for the telecom operations not being given out any more, the acquisition of an existing telecom operator, preferably the one holding 3G licenses, would make a sense for an entry into the telecom industry.
Thus, it could make sense for Reliance to enter into a sector ripe for consolidation and chances of acquiring a company at rock bottom valuations, even if the company demands a certain premium in order to be a buy-out target, in the depressed industry of telecom.
Does it make sense for Reliance to venture into Telecom space? What’s your view?
SORRY ,THI IS A MERE SPECULATION , AND WRONG ANALYSIS , RELIANCE ALWAYS ENTER TO THOSE SECTOR WHERE THEY CAN GET MONOPOLY ,TELECOM SECTOR IS LIKE A SINKING SHIP
Hi Viral,
I was lurking on the site quietly for sometime :-)
Yeah…my point about Reliance doing something for the country is something I just threw out there. But really if I were a shareholder of Reliance I would definitely hope that the company stayed out of the dog-eat-dog kind of situation in Telecom. I am not knowledgeable in this industry but I can say with some confidence that in US, Japan and some other developed nations, telcos are not really profitable businesses to put your money in. Docomo has found that Japan market is almost saturated with only small incremental growth, as a result they have moved into India etc.
Power is just an idea… but I hate power companies that use bio fuel (coal etc.) and I don’t understand why the govt. is giving out such licenses. They should be focussed on clean energy. What is the meaning in setting up new industries that will lead to pollution and set us back by decades?
Anyway… time will tell what Reliance will do with its currency stash and we continue our debate on its pros and cons.
Hi Viral,
Great post. Keep it coming.
As an Indian and an investor, I have three slightly differing hopes for Reliance’s cash.
1. As an Indian I would want Reliance to do something that serves the community and improves the lives of people. For example: Start a bus or train company, if it were or could be privatised, to improve the transporation problem in this country.
(How about purchasing Air India and turning it around?)
2. As an investor or shareholder of Reliance (which I am not), I would hope that as a responsible management they should invest in profitable ventures what ever that could be, as long as it is in their circle of competence.
If both the above can be done by taking a single step, great! There is nothing much to be had by putting the money in a industry with not so great margins, be it telecom or power. They are commodities and they will ultimately be competed on price, services and quality, and may not be the industries that keep generating lots of profits for the shareholders.
Lastly,
3. If the company cannot really come up with great ideas they should return the money to shareholders in the form of dividends or stock purchases.
Hello Madhav,
Nice to read your comment after a long time. Where were you?
I agree with you when you speak about the noble thought of community service as a part of corporate social responsibility in serving the common people.
Regarding your other example of turning over Air India seems to be bit heavy task, as even most of the other private airlines are bleeding, in this sector. The same can be said about telecom, but chances of consolidation are higher moving forward – though it may take few years for this industry to again stand on its feet.
A majority school of thought seems to have already given-up on the prospects of the telecom sector. But, I feel industries as a whole do make comebacks with shifts and evolvement of policy decisions. Same can be said for Airlines sector as well.
Power industry seems to be a better scenario with fair returns on the capital invested, what with India being under power deficit status currently. But, spreading into this sector needs to be fast before other private companies find their feet over here. Power sector may not baost of outstanding returns, but stable returns for sure.
All-in-all, your views are well taken by me. I am sure the company must be doing a great deal of community service in and around Jamnagar where the company has two major refineries. But, something for the whole nation won’t be a bad idea either.
the best part, i assume will be that it would be interesting to see both brothers fight in this sector. it should bring the rates further down, & then, there is the rural market, the supposedly bottom of the pyramid that i believe is yet to be fully tapped, if i might say so!!!
And thats where such enterprises lead to development of the nation!!!
i can fantasize the indian customer to be US-like taking advantage of the fights between [br]others. :)
Hello Nikhil Bhagia,
I agree with you, it could be an intense competition between the two brothers, if Mukesh Ambani-led Reliance comes face-to-face with Reliance Communications.
And, if this happens, for the first time, instead of the shareholders, it would be the users of their service that would tend to benefit more. Of course, all this only until some sort of sense of stability prevails after couple of more years of grinding for the telecom sector.
I recently read on net that Reliance has already laid Optic Fiber Cables (OFC) covering entire length and bredth of the country to connect its refinaries, pipeline networks, its retail outlets, petrol pumps and its logistic business. The same cables can be ramped up to offer broad band services such as Internet TV.
The same article says that Mukhesh already held equity in a telecom company with licence through a senior executive of RIL.
Looks like the future possibilities are interesting.
Great analysis and really well-written. Hoping the trend would continue :)