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?