Gut Feeling

RIL's broadband Bet: Broadband subscriber base in India to increase 8 times in 3 years

2010-06-12T14:26:00.005+05:30

In my blog dated 6th June 2005 NEXT REVOLUTION IS BROADBAND, I predicted that Reliance would lead a broadband revolution. In my OPEN LETTER TO MR. ANIL AMBANI dated May 27, 2005, I predicted that data revenue would surpass voice revenue and Reliance Infocomm’s optic fibre infrastructure is a potential gold mine. Mukesh Ambani’s big bang entry into broadband reconfirms – Broadband is the next revolution and RIL will lead that. Fight between Ambani brothers delayed it by 5 years but now the time has come!!
RIL has bid around Rs. 13000 crores for all India broadband spectrum. My back of the envelop calculation suggest that India’s broadband penetration needs to increase 8 fold in the next 3 years for RIL to break even.

Sr. Ambani would again try to create a “Monsoon Hungama” kind of Hungama and this time wireless broadband launch would be a ‘big bang’ launch. It might take him 12 months to source the equipment etc. They might leverage Reliance Retail network to reach the maximum number of customers.
RIL would expect atleast 30% of its revenue to come from corporate clients and RIL is really good at this. For the first 12-18 months they might focus only on corporate clients and high pay capacity circles like Mumbai and Delhi.
The real challenge is to launch broadband in the interiors of India. The wireless technology is a big enabler, however RIL need to get the decentralized customer focused mindset for that, which till date have proved illusive for RIL.
If RIL is able to get it right this time, it would be no less than a revolution. Interiors of India although today connected by mobile phones are still not great in terms of connectivity of roads, rails etc. Unlike many other developed country, India has the advantage of high density of population which brings down the per capita capital cost of broadband and makes the operation very economical. Secondly, like in mobile revolution India again has the opportunity of skipping 2-3 stages of development in broadband infrastructure and directly moves to the latest technology.
India suffers from grave disparity in land prices, salaries, opportunities due to lack of connectivity infrastructure (like rail, air transport, roads etc). Broadband revolution can change all that. It can improve governance, education, information flow. It can also cure some of ‘constrains to growth’ created by lack of transport and other infrastructure. IT/BPO revolution which is limited to cities till today can move to town and villages. The possibilities are endless. Online shopping, gaming, education, services….. Size of the market will increase and it would be easier to target ‘able to pay’ customers in the hinderland who are today uneconomical to reach due to small size.
Sunil Mittal once mentioned that telecom is like packman. It keeps eating various businesses and growing. Broadband is one such packman it will eat many businesses like retail, banking, transportation, entertainment etc. Broadband revolution, if implemented well, has the capability of pushing India into high growth trajectory which will help it bridge the gap between developed and developing nations. All the best Mukeshbhai! We wish you all the success!!

"Double Dip" coming

2010-05-21T18:06:00.002+05:30

Alcoholism can't be treated with alcohol similarly the problem of excess debt can't be treated with more sovereign debt. World should prepare to spend couple of painful years in rehab.

All these bailouts can only defer the problem, it can't cure the problem.

Reliance: Staying sane during insane times (excess liquidity times)

2009-06-01T17:12:00.001+05:30

The economic slowdown had hit everybody hard and RIL is no exception. Many of its projects like Reliance Retail, SEZ etc have been affected. But if one looks around RIL has managed to control itself really well during the Insane Years of 2005-2009. Not only it managed to focus and complete its major Greenfield projects – KG D6 oil & gas project, Jamnagar 2^nd Refinery project, East west pipeline project in time, but it also managed to stay sane and avoid the lure of mega international acquisition unlike its peers. And staying sane in such insane times is no mean achievement. If you don't agree, ask Tata, Birla or Mittal.

Last few years had been really mad years. Factor of production (land, labor & capital) prices had hit the roof and most businesses were unviable at market value of factor of production (not to be confused with historic value). The only way people could make money was by selling out stake or the business to public through IPOs, to private equity firms, to strategic investors or to competitors. The best and the biggest company in India fell for the lure of international acquisition including Tata group, Birla group and also the Mittal group. Ratan Tata had been bold enough to admit in public that they ended up buying Corus, Jaguar & Land Rover at peak prices and it had been a big mistake.

Others like Birla, Suzlon and Mittal had been equally foolhardy and now realize that they made a mistake although they might never admit in public. On the other end of the spectrum had been players like Ranbaxy who managed to exit the business at a very good price. We may keep arguing that selling out completely made sense or not but we all will agree that timing was amazing.

So why did it happen? Do these companies don't have smart people who can advise the management properly? I don't think it's a skill set problem (Finance Problem). I believe it's an individual's interest Vs Company's interest problem (HR Problem). I see a systemic problem here. The system has a built-in bias towards occurrence of the deal. The system incentivizes people who vote for the deal and penalizes who vote against the deal.

Today corporate world is designed in a fashion where you are paid incentives and bonuses for making deals and not for voting against it. Investment bankers make money when deal is done; consultants make money when deal is done. Even the company's in-house managers reap benefits in form of bonus, recognition in the organization, additional responsibility when the deal is done and a sane advisor who advises the management against it is a looser both ways. If the management goes ahead with the deal the one who advised in favor of the deal get the recognition, responsibility of the new company and all associated benefit. In case management decides against it for any reason, nobody gets anything. Hence, advising against the deal is a lose – lose strategy.

From Investment bankers to Media, for everybody occurrence of the deal is beneficial and hence in most cases the deal happens. Again, higher the value of the deal, higher is the commission (for I-bankers, consultants and experts), higher is the interest of the public (for media), and higher is the recognition & responsibility (for in-house managers). And to top it all the excess liquidity in the system, thanks to Mr. Alan Greenspan & company made sure arranging funding for it was never a problem.

So what helped RIL stay sane when others could not resist the temptation? This is despite Mukesh Ambani declaring in two consecutive AGM, the company's ambition for international acquisition and change of strategy towards inorganic growth. It seems there were few in RIL who were ready to take lose-lose strategy for self in the interest of the company. I hope RIL if not rewarded, at least recognized these selfless employees.

How the Financial crisis could have been handled better by the Bush Government

2008-12-29T12:28:00.001+05:30

The way USA government is handling the Financial crisis is blasphemous and I believe they are living in fool’s paradise. A country which is threatened by outsourcing of jobs to country like India & China is able to dole out bailout of a Trillion dollar with such frequency!! To put things in perspective India’s GDP is around $ 1 Trillion per annum and that of China is around $ 4 Trillion per annum. (USA GDP is around $ 14 Trillion per annum). According to my estimates USA government has doled out around $ 8 Trillion as bailouts in the last 12 months. It works out to 8 times India’s GDP, 2 times China’s GDP and almost 57% of USA’s GDP!!! If USA government is made to payout 12% interest (rate of interest in India) on the bailout amount, USA would be paying interest equivalent to India’s GDP each year!!!

I believe everybody agrees that the financial crisis had been handled very poorly by USA and they have managed to survive due the Dollar Hegemony, otherwise they would have had the fate similar to that of Zimbabwe – mindboggling inflation rate with domestic currency rendered worthless. (I believe eventually USA will have to pay for it and dollar will crash soon).

I believe the Financial crisis could have been handled by following simple steps listed below. Why it was done the way it was done puts in question both - Bush government’s intelligence and the vested interest:

1. Guarantee total current, saving and fixed deposits in banks for 5 years: (currently FDIC guarantees deposit upto $ 200,000 per customer per bank). This would have taken care of the confidence crisis and people would have deposited money in banks without fear. It would have helped increase liquidity with banks and increased their deposit : lending ratio
2. Make all deposits in banks tax free for 5 years: This would have given incentive to save to US nationals. Currently savings rate in USA is almost negative and is one of the biggest reasons for the current crisis. This would have also reduced the cost of funds for the banks as deposit rate expectations of customers would have decreased. It would have also made bank deposits more attractive investment option in comparison to other options.
3. Provide banks with tax holiday on interest income for 5 years: This would have reduced the cost of funds in the economy and would have increased investment activities in the economy. This would have also made the banks balance sheets stronger.
4. Let the weak bank to fail and file for bankruptcy under Chapter 11: No bailout should be provided to any bank or company before it files for Chapter 11. Chapter 11 has been designed to provide businesses an opportunity to reorganize and survive if the possibility exists. If the banks / companies donot have inherent strength to survive they should be allowed to die. Contrary to the myth created by the Bush government, closing of few banks will not destabilize the system if depositors are protected. Jobs are not lost or created by such bailouts. If the business makes sense somebody will buy out in part or whole of the bank otherwise some other banks will grow to fill the void left by the failed banks – creating more jobs and business activity.
5. Strictly penalize wrong doers: The current US government plan is rewarding the wrong doers by giving out bailout. It should be doing exactly reverse. Negligent and reckless traders and bankers should be strictly penalized to create examples for others.

The above plan is superior to the plan used by USA government due to following reasons:

1. Incentivizes savings rather than expenditure: USA government has created a myth that an economy grows by spending more rather than saving (& investing) more. And hence they had been spending recklessly specially during the last 8 years. Sooner they get rid of this false notion the better.
2. Takes care of the confidence crisis: Full security of deposit creates confidence in banking system. People will park their saving in banking system without any fear as it would be as safe as US government security. We can see that there is so much fear currently that people are willing to park their funds in US government securities at almost 0% rate of return.
3. Makes banking fundamentally stronger: Tax holiday of 5 years on both deposits and advances makes the banking business fundamentally stronger. The spread for the banks improve, thus improving their profitability. It also reduced the cost of fund in the economy, which would stimulate investment and demand.
4. Fair and equitable: One of the most important reasons why this system is better than the Bush government’s plan is that it’s fair and equitable. It doesnot protect only the banks which are “too big to fail”. It spreads the benefits to depositors, borrowers, mortgagees, small and medium enterprise & businesses. Who should survive and who should not is decided by the market forces and not by Mr. Paulson.
5. No moral hazard: The proposed system doesnot provide any incentive to wrong doers. It also doesnot create a feeling of being cheated to people who had been handling their finances properly. It stops the practice of expecting bailouts on the pretext that others have got the same.
6. Lets the market decide: The incentive (in form of reduced taxes) is fairly divided among people who are saving and people who are borrowing for justified causes. On the other hand banks which are reckless and negligent are thrown out of the system. It’s the survival of the ones who manages their business well and Chapter 11 for the one who can’t.
7. Substantial less cost to the taxpayers: The cost to taxpayers in form of reduced tax collections from deposits and advances and from protecting of deposits would be substantially less than the billions of dollars of bailouts currently being doled out.

Terror Attack: What India should do now?

2008-12-02T21:44:00.000+05:30

Everybody agrees its time to take hard decisions and our soft approach is costing us dear. At the same time world economic situation is grim and we should not loose focus on Economic growth. We should remember that the terrorist were targeting our economic growth and we should not let them win.

So what should we do now?

Diplomacy – Foreign Ministry

The need of the hour is tough diplomatic stand by India. The world is in far worse financial condition than India and they too can’t afford an India – Pakistan face off. Its time we assert ourselves and claim our rightful position in the world. I suggest following diplomatic steps:

1. Stop all diplomatic talks with Pakistan as Pakistan is a divided nation without a single command. The elected representatives are just lame ducks with no control over armed forces, ISI and other organizations. We should communicate to the world the futility of any talks with such lame duck government. We should cite example of Kargil war where Nawaz Sarif admitted that army / ISI acted without informing the elected government. The coup that followed is enough proof of that. Condition is no better today.
Declare that India will not enter into any talk with Pakistan until we have 24 terror free months. No cricket, no sadbhavna buses and trains and no trade.

2. Take a hawkish stand in front of the world. Tell USA that we supported them when they needed us and now its time for them to return the favor. Play back the video to them with Bush’s famous lines like “either you are with us or against us. There can be no fence sitters.” Tell USA, Israel etc that we have common enemy and we need to destroy them. Anyway USA is bombing Pakistan border which is a proof enough that we have ‘commonality of purpose’.

3. Show to the world that we have enough proof of Pakistan hand in the terror attack. Ask US and other intelligence agencies to come and work on the case with India team and see the proof themselves. Satellite phones, level of training, sophisticated weapons will provide enough proof of its origin. We don’t care which part of Pakistan – elected government / Armed forces / ISI is behind the attacks. For us all three is Pakistan and we need to ‘neutralize’ them. Tell the world that proof is much more than ‘weapon of mass destruction (WMD)’ proof provided by USA government and failing to support India this time would be a proof of ‘double standards’. (Famous lines of Obama where he admitted that he didn’t understand why USA attached Iraq during election campaign should be used to rub the point in)

4. Force the world to deny any bailout package for Pakistan. Recently IMF gave a bailout package of around $ 8 billion to Pakistan to tide over the economic crisis. India should fight hard against any such financial support to Pakistan. We should clearly communicate that Pakistan is using these funds to fund terrorism against India and financial support to Pakistan is equivalent to supporting terrorism. Similarly force USA to stop all financial and equipment aid being provided to Pakistan armed forces on the pretext of war against Al-Qaida / Afghanistan. Tell them that indirectly they are providing sophisticated weapons to India’s enemy which is promoting terror attacks in India.

Internal systems - Home Ministry

1. Modernize the security system: Need to make use of best technology available. Make sure we atleast have equipments better than those of terrorist like Satellite phones, AK – 56 / MP 5 etc. We should be investing in sophisticated weapons & armored vehicles for our forces and not luxury cars for bureaucrats.

2. Transfer 50% VIP security budget to anti-terrorism security: Transfer 50% of the budgeted amount meant for VIP security to security of public places. This would show that politicians are concerned. It’s important that politicians feel more venerable to terror. Otherwise we will breed RR Patil (Maharashtra’s home minister) like thought process that “in big cities such small things happen.”

3. Have a single Anti-terrorism body with enough decision making powers during emergency: We all must admit that the way we handled operations after the attack happened left too much to desire. The time taken by NSG to come to Mumbai, decision time to send them, availability of aircraft for them, weapons and training, communication systems, everywhere we were lacking. There was obvious lack of coordination between different forces which was evident from handling of general public and media at terror sites, sharing of information between different forces etc. Again we here that information relating to terror attack was available in parts with different government bodies. We need to have a single body where all such information flows so that we can solve the zig-saw puzzle in time.

4. Spend more on intelligence gathering & information systems: Every country has intelligence system which generally is beyond the petty politics. We also need to invest in a high-tech information system. We need to place more CCTVs in public places / have central control rooms to monitor these cameras placed at railway stations, markets, malls, hotels etc. Al five star hotels have CCTVs. We should team up with communication companies and use their unutilized optic fibre to have option of transmitting these feeds to central control centre in times of need. We also need to guard our borders better. Accepting bribe to allow any kind of traffic across border should attract highest level of disciplinary action.

5. Cut support to terrorism: Terrorism can’t survive without support from insiders. We need to make sure that all funding to terror organizations is nibbed from the bud itself. These organizations collect contributions in name of religion from people who are generally unaware of the purpose for which these funds would be used. We need to communicate in clear terms to people that any direct of indirect support to these organizations knowingly or unknowingly would be treated as act of supporting terrorism and would be dealt with strongly. Ban all organizations like SIMI etc. that support taking law in their own hands in name of militancy / freedom etc. Any donation in cash or kind to these organizations should be considered as an act of supporting terrorism. Also make strict laws against other sources of funding for these organizations like drug trafficking, etc. Generally drug trafficking and other such traffic across international borders and terror traffic use the same routes.

Concluding remark

First step towards solving a problem is to understand the problem and admit the nature of the problem. We need to admit that Pakistan is no more a single nation with single head of state. Pakistan is a fragmented divided nation where various government and non government bodies are trying to exercise control. We also need to admit that they are getting support from Muslim fundamentalists inside India and they are prospering due to our vote bank politics.

Once we admit and understand the problem solution would be simple. As done in a war first cut the supply lines of the enemy and then strike when they are weak. We need not go into war against Pakistan immediately although we should act hawkish and should be mentally ready for it.

We should kill Pakistan by isolating them & cutting all their supply lines. We should make sure that they don’t get the promised IMF package and any other bailout. We should go for war only if the world tries to act soft on Pakistan, in which case we Indians will have to take an assertive stand. And if and when we go to war we should make sure that then there is no looking back. We should divide Pakistan into bunch of primitive tribes which would keep fighting among themselves with primitive weapons and let us live in peace.

Admit it! The root cause of current crisis is OVERVALUED DOLLAR

2008-11-21T23:25:00.000+05:30

….and the only solution is to devalue it.

The world leaders are giving the current crisis different name like “Sub Prime Crisis”, “Liquidity Crisis” etc etc. But any person with basic common sense can tell that sub-prime or liquidity can’t be a big enough issue to put the world economy in doldrums. The root cause needs to be diagnosed. Until we admit to the problem, we would be taking wrong medicine.

Let’s diagnose the disease. We have divided the symptoms based on the partial diagnosis made by leaders till date:

So called “Sub-prime Crisis”

1. US consumers are defaulting on housing loans & other loans in big numbers
2. Per capita consumption of US nationals has been 2x-3x in comparison to that of nationals of other developed nations. (per capita consumption of cars, steel, cement, crude oil etc)
3. USA’s fiscal deficit for the last few years is in excess of $ 400 billion each year

So called “Liquidity Crisis”

4. The world holds their savings / foreign currency reserve in USA securities. As it’s the world’s standard currency. And as the return on govt. securities has been falling other the years, nations have started investing in quasi-government organization’s securities like Feddie Mac and Fannie Mae.
5. The world has been buying these debts having faith in USA’s credit worthiness and credit worthiness of its institutions
6. USA financial institutions have packaged and repacked housing, credit card and other debts in form of CDOs etc and sold it to the world. Now these financial institutions are going bankrupt

So called “Outsourcing” problem

7. USA is dependent on China and other countries for most of its consumption. USA is importer of almost everything. Salary and cost differential in USA is leading to outsourcing of major chuck of goods and services from developing countries
8. Most of USA manufacturing industry is dead. US automobile companies are about to go bankrupt. Japan & others are able to build better cars at lower cost. IBM has sold out the hardware business to Lenovo.
9. Salary level in USA is substantially higher than in developing countries, which is leading to brain drain problem for developing nations and job loss problem for USA.

So called Consumption led "growth”

10. Standard of living is higher than rest of the developed world. Per capita consumption of US nationals has been 2x-3x in comparison to that of nationals of other developed nations. (per capita consumption of cars, steel, cement, crude oil etc)
11. Consumption has been growing without increase in jobs. Salaries are high despite of limited skill advantage. Imports has been growing and exports have been falling
12. China & other countries had been investing their foreign exchange reserve in US securities against nominal return of 2-3% when opportunity cost of the fund is much higher

Diagnosis:

Point 1-3: USA as a nation and US nationals has been living beyond their means. Consumption led growth has been financed by debts which has started to haunt USA

Point 4-6: World has been duped by the financial engineering of US financial institutions and misplaced faith in USA’s credit worthiness. However, now the world is slowly realizing the risk & mistake

Point 1-6: The world economy growth in last few years was led by unsustainable debt driven consumption by USA. Problem in servicing of debt is leading to world economy going into financial crisis.

Point 7-9: USA has become inefficient and high cost economy. They are unable to compete even in traditionally strong sectors like automobiles, IT hardware etc.

Point: 10-12: Consumption in USA has been growing despite of fall in production activities because developing countries had been subsidizing USA consumption by investing in dollar denominated securities with nominal return.

Actual Disease:

Dollar is Overvalued

Point 1-12: USA currency is overvalued. Due to overvaluation imports are cheaper and exports are costlier. Hence import led consumption is increasing while manufacturing is falling. Overvalued dollar has killed domestic industry and has made US economy inefficient.

“Invisible hand” is absent

Point 1-12: If it was any other country the demand and supply of Dollar would have corrected the currency imbalance. However, as Dollar is the world’s standard currency of trade – the excess supply of dollar had been leaking away into foreign currency reserves of other countries in form of US securities. As other nations were ready to lend to USA against its nominal rate securities USA has accumulated unsustainable amount of debt which it is not in a position to pay back.

SOLUTION – DEVALUE DOLLAR!!!!!!!!

Therefore the only solution to the current problem which we prefer to call ‘Dollar Hegemony’ is to devalue dollar. My estimate is: 40 to 50% devaluation in dollar is required to bring it to parity. And of course dollar should loose its “World’s standard currency of trade” status.

The implications:

Positive for US:

1. Fall in real value of outstanding debt: As dollar value will fall by 50% the value of debt in real terms will also fall by 50%. Again value of houses in dollar terms would double. This would be a big relief for the mortgage market and can help turn it around. It will help US nationals deeply in debt.

2. Manufacturing will become competitive: Salaries in USA will adjust automatically. They are at unsustainably high levels which is making USA uncompetitive. Once dollar is devalued by say 50% automatically salary in USA would fall in 50% in real terms. Making USA industry competitive again. Companies like General Motors etc will be able to compete against Japanese and German cars. Salaries & other retirement benefits of US employees is the major issue pulling these companies down.

3. Imports will become uncompetitive: Imports from countries like Chine etc are undervalued due to overvalued US dollar. Once exchange rate is readjusted imports will become uncompetitive restricting unsustainable level of import driven consumption

4. Job creation: Increased manufacturing activities and reduced imports will lead to job creation in the economy. Foreigners like Indian nationals who are taking up large chunk of US jobs in IT, technology research, doctors, nurses etc will find it no longer viable to move to US as in rupee terms their salary is US would be reduced substantially. Outsourcing problem would be solved to a great extent.

Negatives:

International Impact: Devaluation of Dollar will have a huge international impact. Countries like China which hold substantial foreign reserve in dollar denominated securities will suddenly see their reserves depreciating by as much as 50%. Devaluation of dollar will make their exports to USA uncompetitive leading to large scale unemployment and bankruptcy in their country. This will create social unrest through out the world. It can lead to war between nations for resources.

Crash of financial system & global trade: The whole financial system which is today based on faith in US dollar will come crashing down. The world will need to devise a new order for trade and financial settlement.

Elasticity of import & exports: Not all exports and imports are perfectly elastic. Oil imports will not fall substantially in volume in short term. Similarly replacing IT talent of India would be difficult in short term. Similarly for exports, even if the prices fall substantially volume of exports might not increase for arms and ammunition etc.

Savings & Retirement fund: People who had been saving rather than going for debt driven consumption would be penalized due to wrong doing of borrowers. It will create a moral hazard. Their saving would depreciate by 50% overnight in real terms and they might not have enough retirement funds to take care of their old age.

Conclusion:

The international repercussion of Dollar devaluation is so grave that it can’t be done overnight. It has to be a slow process with enough time for nations to adjust. Countries need to be given time to liquidate their dollar denominated foreign exchange holding. World also need time to device and operate new financial and trade order.

But what need to be done immediately is to recognize the real Disease. The world currently suffers from Dollar Overvaluation. Admitting to the disease is the first step. Denial will only aggravate the disease and create other complications due to wrong medicine. Unless we come out of denial mode world will not start moving in the right direction. Bush & Paulson of the world might say that ‘fever’ called sub-prime crisis / liquidity crisis has been cured but it will come back again and again in some form or other – Bear Stearns / Lehman Brothers / AIG / Citi Bank / General Motors / Ford / Chrysler / …………………………………………

Open letter to Prime Minister of India (Sh Manmohan Singh)

2008-09-19T21:26:00.000+05:30

Dear Sir,
The financial crisis faced by the world is a graver situation than that of managing the stock market. What Finance Minister Sh P. Chidambaram is doing currently is pushing the dirt under the carpet and hoping it is not uncovered before the next elections.
To be fair to you the current problem is US making and not of your making but this Financial Tsunami is not fair in its impact any would destroy everything that comes on its way. In 1991 you built the dam of Globalization that powered & irrigated our fertile land for almost two decades. But today this dam is in risk and it can destroy the fertile land. You being the architect of the dam knows better than anybody else how to save the dam of globalization destroying own lands.
We need to do two things urgently to avoid importing the US financial crisis:
1. Diversify the foreign exchange portfolio and move out of US treasury bonds and other dollar denominated financial instruments.
2. Start trading in Crude and other major foreign trade items in Euro and other currencies rather than dollar. At least diversify
As you know law of demand and supply applies to all currencies except dollar due to dollar hegemony. The dollar is already over valued due to this even after years of fiscal deficit and relentless borrowing. However, the current financial crises pose a real risk to dollar and dollar hegemony. All the billion dollar looses that US government is nationalizing has to be paid somehow and ultimately it would be paid by printing more dollars. And as you know very well, printing more dollars means distribution of USA loses to the world.
The printing of dollar, inflation and depreciation of currency is a very slow process and something that can be handled in the long run. The risk current situation poses is sudden devaluation or crash!!
The world is currently standing on thin ice which is melting with each passing day and everybody is wishing that it never reaches a situation when we go down under. The current crisis is sign of crack on the thin ice floor. If we all keep standing till the end we all will go down into great depression soon. As the cracks become big, grave panic would be created and one or few of the members would try to run to the safer place. And we should remember that goliath named China is also standing with us on the same thin ice and if he moves, due to its weight the ice floor will surely break. We have to make sure that we more to a safer place before the goliath begin his move.
(The thin ice here is Dollar based financial system where all major international trade is done in dollars including crude & petroleum products and major share of foreign exchange reserve is kept in dollar denominated securities. People standing are nations who are part of the international financial system and the cracks are the financial crisis. Going down under is Great Depression & the safer place is a world of neutral currency with no single currency hegemony).
China has more than trillion dollar of foreign currency reserve and most of them are parked in low interest paying dollar denominated securities of US institutions like Freddie & Fannie. Sooner than later China will realize that US government with its increasing nationalization of loses would not be in a position to return back these reserves. The only option for US govt is to print more currency to pay back China and others and that would create excess dollars in the world economy leading to collapse of the currency. China to reduce the loss would start moving out of dollar into other currencies or Gold. Or if it’s a fools and doesnot understand the risk of thin ice would force US government to increase the interest rate on these securities. Either ways, the US will be faced with increased financial crisis and the current financial system will collapse.
Again shift of oil trade to other currencies would reduce the demand for dollar required for oil trade and hence the currency will collapse.
Believing that not moving can save us all is foolhardy. One: sooner or later somebody will panic and run across the cracking thin ice floor. (in fact few countries have already started the move). Otherwise the foolhardy US financial management will ensure that the ice melts so much that the whole world goes down into great depression. USA is rooted in his own system and it can’t run. Its time that we desert him otherwise we all will go down with him.
Its time the world decide to move to a world of neutral currencies where value is derived from demand and supply and no single country has enough power to govern the world financial system. The only thing that is stopping us all is the ‘fear of change’. In the long run, the new world would be better than the current one for all of us.
Sir, I hope as in 1991 you will be bold enough to drive the change rather than closing your eyes to the thinning ice hoping that we don’t go down under before the May elections.

Regards,
Neeraj Gutgutia

“Distress Sale” is keeping Dollar Strong temporarily

2008-09-14T15:44:00.000+05:30

The US financial companies are falling like bunch of cards, the economy is in recession, and import bill is rising still Dollar is becoming strong. What’s happening?

“As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. Running a huge trade deficit is costing us money, sooner or later. Already the prediction I made last year about one fall-out from our spending binge has come true: The ‘investment income’ account of our country - positive in every previous year since 1915 - turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.” – Warren Buffett

The USA economic performance and current financial crisis should and will lead to depreciation of dollar. My bet is this crisis would dethrone Dollar from being the “standard currency” of the world and this phase would go down in history as end of dollar era. (Read: End of Dollar Hegomony)*

Against the general logic dollar is appreciating due to fire sale or distress sale by US companies. US companies are selling out their investments (equity investments in developing markets, bonds etc), subsidiaries (Citibank, Lehman Brothers) to strengthen their balance sheets. They are also selling out stakes (Citibank, Merrill Lynch etc) to Temasek and Saudi funds of the world at ‘fire sale’ price in distress attempt to survive. This temporary phase of ‘fire sale’ is leading to fall in buyer country currency and appreciation in Dollar. The temporary upside blip is due to unsustainable capital inflow.

For the time being this may lead to appreciation in Dollar but it is also reducing the future income of USA from abroad. Temasek and Saudi investors of the world will be taking out dollars from USA every year in form of dividends, salaries and expenses.

Apart from future income this fire sale is also reducing the US aura that was derived from these financial institutions. USA is no more ‘the land of endless opportunities’. Soon US B-Schools won’t be as attractive place to study as finance institutions retrench jobs. The fall of these might corporations like Bear Stearns, Lehman Brothers, General Motors, Merrill Lynch, Citi group would end the awe that people have for USA. And with the awe “Made in America” brand would loose its premium.

Biggest Export of USA is neither Intel Chips, nor Boeing Aircrafts, nor McDonald burgers nor Microsoft Windows. The biggest export of USA is Dollar (as investment good). As a result of this financial crisis the world will stop seeing dollar as an attractive investment and that would be the demise of Dollar. And then Dollar depreciation would lead to further depreciation of dollar as US exports & imports are fairly inelastic.

*PS: Sanjay Kaler thanks for sharing this Ron Paul speech. This is the best piece of info I have read on this topic till date.

‘Confidence’ is the underlying asset for Dollar. Do your own valuation of ‘Confidence’

2008-08-21T21:03:00.000+05:30

I have lost confidence in US Dollar and I am betting that Dollar will soon crash. These sorts of things don’t happen very often and therefore so called ‘experts’ (Microsoft Excel operators) will not be able to predict it. But once in a looooooong while these things happen as it happen with Russian Rouble. Russia was looked upon as superpower when that happened and predicting crash in their currency was nothing less than blasphemy then. Eventually it happened and then people marked those events as end of USSR era. I believe the current period will go down in history as end of USA era.

As I had mentioned 3 years back here in my blog the underlying asset to Dollar is Confidence and not Gold as it should be. And as you know the confidence is a very fickle asset, you don’t know when it disappears.

Newsweek: "Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track." In the 25 years that pollsters have asked this question, last month's response was by far the most negative. Other polls, asking similar questions, found levels of gloom that were even more alarming, often at 30- and 40-year highs………… "

Dollar is the prime currency today and is the standard for international trade. Almost all of international Crude Oil trade happens in Dollar. Most of the trillion dollar reserve held by China is in Dollar and same is true for more than 300 billion dollar reserve of India.

For decades now dollar has been the acceptable standard and nobody ever questioned it. After the Bretton Woods Agreement in 1944 when dollar became the international standard for trade, USA was supposed to keep Gold as underlying asset. However, in 1971 USA, unilaterally, has done away with that practice and has been happily printing Dollar ever since with Confidence as the only underlying asset. Till date Confidence has been an appreciating asset all the while with USA companies ruling the world economics. But with the turn of events over the last 12 months – Housing price crash, subprime, Credit crisis, bankruptcy of banks and financial institutions, bankruptcy of automobile companies - USA looks much more venerable today. This bubble has built up over the years as USA kept borrowing from the world to meet the domestic consumption bill of its nationals. CDOs etc had managed to delay the inevitable by creating fake confidence, but then it can only delay.

I believe the current government will continue to delay the inevitable will all kind of financial jugglery just to keep Republican chance alive in the next election. But the new government will have to clean the house and we can expect Dollar Crash prediction coming true around that period. In the meanwhile like Indian Government, USA government will keep on increasing the deficit bill (by off balance sheet items) impact of which will be felt with a lag only after the elections.

Frankly all countries will get adversely impacted by the Dollar Crash in the short term but for the long term general good it’s high time that World practices some “currency diversification”. Few major impacts against which countries & companies should guard against are:

1. Holding all or substantial part of Foreign exchange reserve in Dollar or Dollar denominated US government securities. India and China both are running this risk and I believe many more country is doing the same. It’s high time that we diversify.
2. International trade in critical items like crude only in dollar is another big risk. You don’t know when exactly the music will stop and you should guard against being caught with the parcel when the music stops.
3. Financial instruments which increase your exposure to Dollar. In the current world of financial derivatives, carry trade etc there may be many financial bombs hidden in your treasury department which you might not be aware. Its time to check your cupboards.
4. There are other risk like too much dependence on USA for exports which is difficult to diversify in the short term (IT companies face major risk here)

Sudden move by countries like China and India to diversify there foreign exchange reserve risk or move towards crude trading in currency other than dollar can trigger the crash but we don’t have any other option but to walk the thin ice. Sooner than later the ice will melt.

USA Government and especially Fed are trying to avoid the inevitable. Now it’s a matter of your confidence in their capability to tide over this crisis. I don’t have the confidence and hence I suggest diversification. (Note even if the dollar crash doesn’t happen there is nothing to loose by diversification. Diversification to currency like Euro will only help in the long run).

When will the stock market bottom out?

2008-06-23T21:15:00.000+05:30

At last the crash I had been waiting for such a long time seems to be here. I must admit the market remained irrational for longer time then I expected. But then it’s impossible to exactly time the market. By fundamental analysis you can just say what is logical and what is not. And now readers of my blog will admit that all I said is coming true.
Still doubt my capabilities? Lets have a bet on what would be the extent of correction of when can we say that the market has bottomed out. Game??
My bet is - the stock market will bottom out only after there is a steep correction in the real estate market. By steep I mean 40 – 50% correction!! We will see builders defaulting on loans and banks taking over projects. We will see few builders defaulting on their project commitment and customers running from pillar to post to protect their savings. We may see a couple of suicide or crime related to property prices crash.
People say analysts are generally not specific with their recommendations so that they have an escape route later. Well I will get as specific as possible. Running rate in Bandra East is Rs.12000 – 15000 per sqft and in Goregaon East is Rs. 8000 – 10000 sqft. Wewill see prices in Banda East falling to region of 6000-7500 per sqft and in Goregaon East to 4000-5000 per sqft. My bet is correction would be around 50% in these areas. And these are the prime areas – areas like Kharghar, other parts of Navi Mumbai will see steeper correction. People will realize that Airport, SEZ and Sea-link story are too far in future to price in today.
Logic: The logic behind it is simple. Cost of factors of production – Land, labor & capital has today become so high that most of the projects are intrinsically unviable. Specifically land.
The sunrise industry of this boom of 2005-2008 was – Real Estate & Retail, Airlines, Power and Financial Sector. Retail is already in losses. People are putting in more and more money in hope of future profits; same is the case with Airlines. 3 or 4 with deep pockets will survive rest will sell out or die. In real estate I have already mentioned that it’s all set for sharp correction. In power sector most of the upcoming projects have been based on fossil fuels. It’s a grave mistake and we will soon realize it. Financial sector has already seen correction world-wide and effects will be felt in India soon.
If the best earning guys take the maximum loan to finance their expenditure rather than investments the economy is in trouble and that what happened to India due to the consumerism rush. (note: car and house is expenditure and not investment). Salary corrections, job stagnation, no-bonus announcements will lead to lower future earning expectations and hence loan taking capacity. Added to this looses in the stock market and real estate market will make the customers/investors much more reasonable and cautious.
People say – India Story is intact. I too believe in India story but for that Indians need to invest & work hard not speculate. Last two years earning money had been so easy that people and started resisting working in their regular business with 12-15% return. It was a common belief that it’s better to put the money in stock market or real estate and earn 40-50% return per annum. Everybody can see the result now.
India story has been spoiled by our Mr. Bubble maker – Mr. P Chidambaram. Things which lead to current state are:
Zero capital gain tax: By having zero capital gain tax on long term capital gain from stock market Chidambaram forced common hard working people to ignore their jobs and businesses and rather speculate in stock market.
Forcing Indian Financial Institutions to invest in market to support prices: Not only he made these FIs weak he also created bubble in the market by not allowing periodic corrections
Tax benefits on house purchase and high income tax rate: High tax rates and rebate on house purchase forced people in their twenties to take up 20 year housing loan. A recipe for disaster.
Farm loan waver: Not only it added to fiscal deficit & made the banks weak it created moral hazard. Farmers and other borrowers will always look for waivers rather than paying up in time. Oil Bonds and fraudulent accounting practice: On the one hand he promised to keep fiscal deficit low and on the other hand “off-balance sheet” he dole out oil subsidy in form of oil bonds. Oil price is a difficult problem. But he should not be using such fraudulent accounting practice.
If you see all the 5 points above are clear case of living for today and spoiling the future. India Story can’t remain intact with such fools in power. (I had mentioned these points in my blog several time in the past, I hope in the changed scenario I am making more sense).
There have been other party spoilers like Anil Ambani, Real Estate players and these I-banks for the valuation game they played. But at the end of the day the rule is – “Caveat Emptor” – ‘Let the buyer beware’. It’s only we customers are to blame for falling in their trap and not looking at the fundamentals.
So, willing to take the bet? Tell me when you think the market will bottom out. My bet is after there is correction of around 40% in real estate market.

PS: Bottom out doesnot mean that market will see a ‘V’ shape bounce back after that. It would be ‘U’ shaped. It might take few years to go back to mount 21K again.

Has the Bubble Burst? No not yet

2008-02-23T15:11:00.000+05:30

Readers of my blog know that I had been predicting burst for quite a while now. And to be very frank the current correction in the stock market can’t exactly be called a burst – it’s too soft a landing to be called a burst, it’s just a correction.

What is a “Burst?”

Burst is something that is followed with lot of pain for example:
1. Crash / Substantial fall in prices of all asset class including shares & real estate. (Has fallen a bit but not substantial)
2. Huge cash loss to speculators and erosion in value of portfolio (happened to an extent but still not at a scale as experienced during a burst. Generally lead to liquidation of long term assets to pay off. Even lead to couple of suicides).
3. Realization that many projects taken up in boom time are not actually viable. This generally happens when people bid more aggressively then one should actually bid (good examples may be Reliance Power’s Sashan Project, Reliance Energy’s Sewree – Nava Seva Sea-link, IPL etc.). Many projects get scrapped, delayed or ‘restructured’ after burst.
4. Fall in prices of factors of production – Land, Labour and Capital. (Currently cost of capital and land has corrected a bit but labour cost is still moving north).
5. Inability to pay debts relating to housing loan etc. This is generally accompanied by lack of willingness to pay because of substantial fall in market value of property. (It has happened in USA but not yet in India)
6. Another remarkable feature of all burst is fall of something which was considered in fallible. For example: big companies like Enron, Worldcom etc. (This time it might be one of the big banks like – Citibank.)
7. Growth engines hitting the wall and come down crashing – this bull runs growth engines have been – Financial engineering (banks), Real estate prices and Power sector. Crash should be more evident in these sectors.
Again the Piped Piper of the last two bull runs were Harshad Mehta and Ketan Pariekh – this time it’s Anil Ambani. Anil Ambani’s fall from grace can lead to end of Bull Run. Last two bulls used ‘not so legal methods’ to use Banks cash to manipulate the market. This time it might have been cash from Mutual funds through ‘not so legal methods.’ International banks financial engineering (read sub-prime) is of course there.

So what are the factors which should be looked forward to which can accelerate the pace of correcting into a Burst / Crash.

1. Coming to light of ‘not so legal’ means of using public money (mutual funds / banks) by certain individuals to manipulate the market. Mutual fund is a big risk area. General public is not following the basic ground rule of investing – ‘Never invest in something you don’t yourself understand’
2. Impending elections in two of the biggest democracies of the world and sudden realizations things are not as stable in terms of policy etc as it was assumed to be
3. Realization that many of the declared or bid for project are not actually viable at these prices
4. Sudden change of policy or tax rules (for example currently stock market earning are almost tax free – Short term capital gain (STCG) attracts only 10% tax rate with Long term capital Gain (LTCG) is tax free. Dividend is tax free in hands of shareholders and Mutual fund investments attracts tax benefits under section 80C – It’s almost perfect for investors and as Aamir Khan said in Dil Chahta hai – it’s difficult to improve something which is already perfect. So tax changes most probably would have negative effect. Even decrease in tax on other avenues of savings like for fixed deposits would have negative impact on stock market due to flow of money to other avenues.)
5. More glaring sub-prime related mess in the international economy
6. Fall of a heavy weight (like Citibank etc)
7. Crash in real estate prices and Oil price fluctuation
8. Currency adjustments – ( change of parity in important currencies like Chinese Yuan & American Dollar)
9. Decease in capex by China. China the world's growth driver would breathe a bit easy with Capital expenditure after the Olympics. This would slow down demand for Steel, cement, and construction goods around the world.

Reliance Power Limited (RPL) IPO: All about Brand Power

2008-01-14T17:40:00.000+05:30

Fair price per share = Rs. 130
Brand power per share = Rs. 320
Price per share = Rs. 450

Most brand valuation methods are biased towards ‘sales generation’ potential of the brand. Lux brand is to be valued by the no of units of soaps that can be sold under the brand and the premium price it can command because of the brand.

Now there is “RELIANCE” brand. Unlike other brands it’s not about the no of units of product it can sell but no of shares it can sell and the price premium it can command. And then you need to be a financial wizard like Anil Ambani (ADA) to be able to actually convert brand power into cash. He has created an unprecedented buzz around the IPO. The whole power sector has been re-rated after his big ticket IPO announcement. He had played his cards amazingly well – from making the Investment Bankers (IB) to toe the line to grabbing headlines he has done everything right. The “Power On. India On” campaign is also neatly done. The advertisement has that ‘energy’ about it which generates excitement.

However, there is a problem. Although he shares the ownership of the ‘RELIANCE’ brand with his brother Mukesh Ambani (MDA) he alone is reaping benefits through RPL IPO. In fact bad performance of RPL IPO can seriously dent the valuation of RELIANCE brand and that would affect both the groups. MDA in his speech to employees on the occasion of father’s 75th Anniversary stated that the group has always believed in doing first and talking about it later and will maintain the same in future. It made me wonder whether he was hinting to the reverse strategy being followed by his brother in case of RPL IPO.

The most admirable part of ADA’s wizardry is how he made the IBs toe the line. Deep inside everybody knows that the issue is highly priced but nobody has the guts to speak up.

One of my investment banker (IB) friend remarked “I had never felt so ashamed of my profession like this time. None of the investment bankers have the guts to stand up and tell ADA that pricing is ridiculous. Everybody is hoping that somebody else will bell the cat”.

Another remarked “I always thought I understand the markets well and then something like this (RPL IPO) happens and I realize that markets are too irrational to understand”.

Another remarked “Since Reliance IPO announcement, Power sector prices are not marked to Earnings but to Vision!!”

The world of IBs, where people have the competence to see beyond the brand wrapper has been silenced by awe of ADA and greed of business / money.

But beyond the IB world there is a world of small investors who swear by the “RELIANCE” brand name. I am not sure if even half of them understand that ADA and MDA groups are two different groups now. They don’t understand the nuisances of valuation business. What they understand is that Reliance group has given mind blowing returns to its shareholders in past and expect it to do the same in future. For them RELIANCE is magic wand which turns to gold everything it touches. A RELIANCE IPO can really drive the whole market crazy. Already there is a mad rush to open new demat accounts as was in the case of Reliance Petroleum IPO. ADA mentioned in one of the press conference that if regulation had allowed he would have offered full 100% to retail investors. However, deep inside he knows that getting retail section over subscribed would be the biggest challenge considering the Rs. 100,000 cap per applications. Around 6 lakh applications (assuming historic avg. of Rs. 50,000 per application) would be required for retail section to get fully subscribed. There are around 1 crore dmat accounts in the country and many of those are in-active. Hence retail section is not expected to get over subscribed by more than 3-5 times in the best case scenario. With huge amount of international money waiting to flow into India getting other sections over subscribed would be easier and most probably would be done in minutes of issue opening.

ADA would require some real hard selling. But few will dare bet against him. I believe he knows the game well and will be able to get his issue subscribed. Great market is already quoting a premium of around Rs. 400. Period starting 15 January would be really exciting. I suggest small investors to keep an eye on the subscription figures on the NSE website and wait till the last day before applying.

Valuation

Present value of future cash flow (FCC) method gives a unbelievingly low valuation. I believe ADA’s valuation has been based on the thumb rule – 1 MW = 4 crores. Hence for proposed installed capacity of 28200 MW he is expecting a valuation of Rs. 1,15,000 Crores. Well for installed capacity that valuation might be ok but for proposed capacity??!! Major chuck of the projects would not start operating before 2013.
Valuation marked to vision!!

Implementation Skill & Feedstock Issue

And how many years it will take ADA to install 28200 MW capacity?! Reliance track record for in power sector has never been great. Check out history of Hirma power project in Orrisa and such other projects proposed in late 90s and early 2000s. Apart from captive power projects Reliance doesnot have a track record of building profitable power projects. 40% of the proposed capacity is dependent on Reliance Industries Limited (RIL) supplying gas from its KGD6 fields. The case is under major dispute and resolution cannot be expected soon. (The relations between MDA and ADA is like India-Pakistan now. Even after 60 years firing would continue at the borders and this gas agreement is one such border. After resolution, ADA would require at least three years to build the plant and other infrastructure like pipeline etc. And although I salute ADA for his Financial Wizardry, I still doubt his implementation skill (click to read my previous blog on his implementation skills).

Yes, Reliance is famous for its implementation skills. But which Reliance? – ADA or MDA? – it’s the MDA’s Reliance which has the implementation skill as its core-competence. Please don’t confuse between the two.

Secondly, I personally believe the future belongs to ‘green power’. Rather than betting on coal and gas for power, sources like Wind and Hydro power should be banked upon. Considering the spiraling oil prices the cost competitiveness of fossil fuel as feed stock in future is doubtful.

Verdict: Subscribe for Listing Gains. Re-enter at Rs. 325 – 350 range.

1. This issue is highly overvalued but RELIANCE brand and ADA’s financial wizardry will see it through.
2. ADA to protect his equity/ reputation in the market will make sure that at least during the first few days market price would be higher than issue price.
3. I would suggest retail investors to wait till last day before putting in money. Check the subscription figure on NSE website. Put in money only after retail section has been subscribed at least 1 time and issue over all has been subscribed 5 times. Remember FII’s can withdraw their money at the last moment, if subscription figures are below expectations as they did in Cairn India issue.
4. Apply under full price option. Dont go for part payment option. It would provide an opportunity to sell out at the time of listing itself. Otherwise would be stuck with the stock for more than a month.
5. Sell on listing, making as much listing gain as possible. At least free your capital.
6. If you are compulsive Reliance shareholder re-enter the stock at around Rs.325-350 range. I can bet it will touch that level atleast once between listing date and completion of installation of 28000 MW

Are you out of the Rat Race yet?

2007-12-31T15:00:00.000+05:30

“The problem with the Rat Race is - Even if you win the Race you still remain a RAT!!”

Yesterday I read the book 'Rich Dad Poor Dad' and I must say this is one of the best (in terms of direct benefit to me) books I had ever read.

I have the best two finance qualifications my country can offer. But still the book was a ‘great value add’ for me. Think what value it can add to people who have never studied finance or money as a subject.

It’s not what it says (I believe I knew most of it), but how simply it communicates it. And frankly it helped me clear thoughts in my minds. It revised some basic concepts that I knew but was not using.

The best think about the book was that it gave me my immediate next target (something that always drives me to excel but somehow after IIM & Reliance, I had been missing one such driver) – To get out of the RAT RACE.

Its not that I didn’t knew that I need to get out of the Rat Race but I was not clear about the timing. I had been impatient that I need to quit job and do what I really want to but was not clear when and how. I knew I need to accumulate money before quitting job but I didn’t know how much money. This book just helped me do that.

The answer is simple – You can quit when your money (or investments) earns enough to meet your expenses. And the money you need to accumulate is investments that can earn you enough to meet your expenses.

So, assuming your monthly expenses is 30,000 p.m. (3, 60,000 p.a.) and you expect to earn 20% p.a. on your investment (post tax). You need to save Rs. 18,00,000 (36,00,000/ 20%).

I believe this is not a big sum for today’s DINK (Double Income No Kid) families. Young professionals if they plan & save early can be out of the Rat Race by the age of 30 – 35. And then they have enough time & experience to try their hand on entrepreneurship or do what they really want to do.

But how many of us will really do this? Most of us will still go on and buy a Rs. 50,00,000 house, mistaking it to be an asset rather than a liability, with 20 year loan making sure that one is stuck in the Rat Race forever.

Do yourself a favor – read ‘Rich Dad Poor Dad’ by Robert T. Kiyoski

Spectrum dispute: My solution

2007-12-14T14:51:00.000+05:30

The spectrum dispute is here again and quick resolution is required to make sure that growth in the sector is not effected. At the same time solutions should not be a ‘quick fix solution’ which would lead to new dispute after sometime. Lets first define the problem/ objective - what we want to achieve

Objective

I believe, an effective solution should meet following 7 ground rules:

1. Solution should help accelerate the growth in the sector and should increase telecom density.
2. There should be effective utilization of spectrum (being a scarce resource). There should not be any hoarding of spectrum.
3. It should not cause revenue loss to government by benefiting one or few telecom operators. At the same time focus should be on growth rather than revenue maximization
4. The solution should be equitable. At the end of the day all players should be at equal footing and nobody should get unfair advantage
5. There should not be any entry barrier for new players
6. Existing players should not be at a disadvantage. Due consideration should be given to high cost incurred in past by existing players in terms of revenue share, license fee, taxes etc
7. The solution should not create legacy problem. History can’t be changed but it should not become a weight which keep pulling the sector growth rate down. Solution should have flexibility to adjust to changing scenario in future.

Solution

Following is the 3 step solution which I believe meet the ground rule laid above.

Step 1: Existing players should have only 4.4Mhz spectrum in each circle irrespective of technology used. All players who have spectrum in excess of 4.4 Mhz to surrender the spectrum. In circles, if any, where existing players have already exceeded feasible subscriber spectrum ratio additional spectrum limited to the excess subscriber base (in the same ratio), should be allowed to be retained – I believe there is no circle where it has already exceeded. The no of subscriber / Mhz of spectrum ratio should be very strict and set at highest level considering the best practices and best technology available. It should lead to efficient utilization of spectrum. There should be single standard for all technology so that there is an incentive to use the most efficient technology.

Step 2: No distinction should be done between GSM and CDMA technology. Players like Reliance who want to start GSM service should be provided single 4.4 Mhz spectrum for both technology. They might be provided option of surrendering the existing spectrum in case they want to switch technology and the new technology requires another spectrum band. Should not be charged 2nd license fee. Rs. 1651 crores paid by Reliance should be returned.

Step 3: Excess spectrum lying with Govt. should be auctioned with both the existing players and new entrants having right to bid. New entrants would have to pay licensee fee over and above the spectrum bid amount. Existing players can use the spectrum to enhance their network while new players can use the same for setting up new network. This would provide existing players’ fair chance to get additional spectrum if they need it at the same time there would be no incentive to hoard the spectrum. It will also make sure that non-serious players don’t enter the business and hoard the spectrum.

Impact

GSM players might resist step one while Anil Ambani would resist step 2. But seen as a whole the 3 steps make it fair for all the players including new entrants. Third step is providing new players an opportunity to enter at the same time existing player are getting the advantage of free first 4.4 Mhz spectrum to compensate for the past efforts, risk, cost etc. this also takes care of the policy legacy problem.

Conclusion

Couple of years back when the same spectrum dispute was going on I had supported Ratan Tata’s views on paying for spectrum. Here again I am suggesting need of market forces to decide value of scarce resource like spectrum. At the same time I would repeat what I stated in my blog regularly in past – telecom is highly taxed sector and focus should be growth maximization rather than revenue maximization. Govt. should look at reducing other taxes like service tax, revenue share etc. to accelerate growth in the sector.

New game at Dalal Street

2007-11-26T15:57:00.000+05:30

The Bubble Maker’s (Mr. Chidambaram) decision of making long term capital gain tax free has led to another black to white game at stock market. Here is how it’s played.

Origin:

As you all must be knowing that all Long term capital gain is 100% tax free while short term capital gain is charged to tax @ of 10% only. How can a government that came to power by advertising itself as the Messiah of “AAM ADAMI” can be so against the “AAM AADMI”. In today’s tax regime speculators and gamblers are not supposed to pay tax on their winnings while people who work hard to earn their living are supposed to pay 30% tax on their hard earned money. Hence even people who used to work hard has joined the speculation and gambling bandwagon. Mr. Chidambaram, are you getting any cut from these stock brokers / promoters etc?

Structure of Play:

The operators in the market search for stock which has limited liquidity (stock in which public holding is very less and most of the stock is locked with promoters). Then they collude with the promoters. Operators inform the promoters of their intention to play in the stock and requesting them not to start selling their promoter stake in open market. Now the operators slowly and steadily pick up substantial chunk of the stock from the open market leading to reduced liquidity and buzz around the script. They start buying aggressively at very high price in small lots creating a frenzy in the market leading to small investors entering in the stock. The small investors who are feeling foolish to have missed out on the Bull Run rush to buy the share and lead to further increase in price.

Once price have increase to 2x – 3x of the original price promoters transfer their original holding in the company from one holding company to another. In the process the original holding company makes substantial Long term capital gain which is not taxable. Hence promoters are able to build up substantial white money in their books. This also help promoters who have black money parked outside India get this money back in India in this falling dollar regime.

Gainers:

a) Promoters
1. Able to convert his back money in white money without paying any tax
2. Able to create enough white money in his accounts even if actually he doesnot have the money (super money). This helps in showing promoter contribution in new projects. (Most of you must be aware how promoters escalate the project cost in business plan to get large amount of bank finance and their actual equity contribution is nil).
3. If the promoter is planning to come up with FPO / right issue / IPO for subsidiary or a group company / share swap for takeover etc increased valuation helps.
Promoter can now raise higher bank loan by pledging shares help by second promoter company. As the cost price & market price of these shares is much higher, banks are willing to provide higher loan against higher valuations.

b) Operators
Operators cash out by selling the shares they accumulated at lower price, at high price making substantial short term capital gain. (People must be aware how these days short term capital gain transactions are being traded between businessman who want to convert their black money into white by paying minimal tax and operators who don’t want to pay any tax. These businessmen show these transactions in their own books and pay 10% short term capital gain tax. Rest 90% becomes their white money. They save straight 20% in tax (30% - 10%) which otherwise is payable for business income. On the other hand these operators are not even required to pay 10% tax as the transactions are made in others accounts).

Losers:

Small shareholders: Small shareholder fearing missing the train buys shares at all price and hold on to it once operators have left believing those shares are really worth that much.
Government of India: Huge revenue loss. Everyday we read newspaper where experts calculate and show the expected revenue loss due to tax benefits provided to SEZ. Why no expert provide a figure to the revenue loss suffered due to charging capital gain at 0% or 10% tax rate instead of 30%?

To test the above theory, try to see the market behavior over last couple of years (since capital gain tax laws have changed). Look at those scripts that have increased the most during this time. And look at the movement of promoter holding between various companies of the promoter. Look at the amount of loan raised against the pledge of shares by promoters. I am sure you will find the connection. Another good test would be whether promoters have made these transaction through market or off market. Capital gain tax advantage is applicable to only market transaction. I cant think of any other reason to do a market trasaction for promoter share reorganization as due to STT its works out costlier than off market transactions.

Probable example:

Reliance: Due to separation of Ambani brothers both group has ‘reorganized’ their shareholding structure. They have done away with the maze of holding companies and have made it more transparent. This entailed several transaction of transfer of shares from one holding company to another. Can anybody work out amount of white money created in the process.

Essar: The group has done lot of reorganization over the past two years. It has also raised substantial loan by pledging promoter holding in various companies. And the Essar Oil and other group stock prices sky rocketed in a very small span of time recently. Smells fishy.

Well, this is just food for thought. Please do let me know your arguements if you believe the above is not possible.

Open letter to the Finance Minister – Mr. P Chidambaram (the bubble maker)

2007-10-13T15:05:00.000+05:30

Dear Sir,

Recently I read you comment “The rather steep rise in Sensex sometimes surprises me, sometimes worries me”. Well sir, I hope you realize that this bubble is of your own making and with such comments you can’t absolve yourself from being held responsible if there is a burst in near future.

Recently there were also media reports that you have asked bankers to review interest rates downwards as it is hurting demand and growth.

Sir, both the problem (steep rise in Sensex and rising interest rates) are result of a ‘market friendly’ tax policy you announced few years back. Since then stock market is moving in only one direction and you have received lot of credit for that but now need to look deeper.

By removing Long Term Capital Gain (LTCG) on equity market deals you have made investment in stocks as the only viable savings & investment options for tax payers who fall in higher tax bracket.

If an investor invests his savings in fixed deposit he has to pay income tax of around 33% while an investor who investor who invests in stock needs to pay nothing (apart from negligible around 0.4% STT) on capital gain made on stock. Hence small investors who are not very open to equity market risks are also forced in to invest in equity market as bank fixed deposits offer rate or return equal to inflation rate (9% less 33% tax = 6%).

Sir, in interest of protecting small taxpayers who would prefer to invest their savings in risk free fixed deposits I request you to have “level playing field” for both the investment options. You are requested to make interest on Fixed Deposits (FDs) tax free if period exceed 1 year same as the case with equity investments.

This will solve the following purpose:
It will make deposits cheaper for banks and hence lead to reduction in lending rates
There would be a healthy correction in the stock market to more realistic levels
Society / small & venerable investors would have a safe investment option which is not tax unfriendly

I hope you will look beyond your favorite kind (stock market) and stop this step-motherly treatment to other saving options.

Regards & Thanks,

Neeraj Gutgutia

M: 9867614375

Board of Cricket Control of India (BCCI) Vs Indian Idol

2007-08-17T16:42:00.000+05:30

BCCI stands for Monopoly & Dictatorship and Indian Idol stands for Competition & Democracy. And that is why BCCI should not be allowed to shun competition by banning / disqualifying wannabe Cricketers who join ICL (Indian Cricket league) started by Subhash Chandra of ZEE TV fame.

Subhash Chandra although acting in self-interest is doing great good to Indian Cricket. Even today in India, where Cricket is a religion the selection process is not at all transparent and is ridden with favoritism, regionalism etc. Very few players are known outside their limited community before they actually make it to the national team. The Ranji process which looks good on paper has not produced desired result. On the other hand there is successful model like the England’s County Cricket which not only helps upcoming Cricketers to get exposure to some real Cricket but also help pursue their career choice with financial independence. It’s shameful that a country which almost finances the world Cricket (a large share of sponsorship money in Cricket comes from India) don’t have enough money to support its domestic Cricket.

The support infrastructure for a budding Cricketer in India is almost non existent and competition here can do a world of good. With the kind of money Cricket attracts today why can’t we have several state / county teams competing each other. Here is where Indian Idol comes in.

Indian Idol is a symbol of what competition can do to a profession. Today on every channel there is show where participants from all over the country are competition to prove themselves as the next generation of singers. I had been following Indian Idol 3 for some time now and I must say the quality of singers is just mind blowing.

People might complain that selection process is not right or the best candidate donot always win in such competition. The point is not that. The point is that there is a platform where 10-20 wannabe singers can showcase themselves every six months or so. Some will win some will loose, maybe Deepali is a better singer than Ankita but the fact of the matter is atleast she got a chance to show her talent to the world. Tomorrow when Subhash Ghai or Yash Chopra is selecting singer for his upcoming movie atleast they have some more options. Deepali may not go on to become the leading singer in the country but sooner or later she will get a chance to try her voice as Radio Jockey (RJ).

ICL can provide a platform for Cricketers like Indian Idol, Voice of India, Sa Re Ga Ma etc is doing for Singers. And what is the locus standi of BCCI. The Supreme Court on recently held that the Board of Control for Cricket in India (BCCI) was an autonomous body discharging duties such as selection of an Indian Cricket team, controlling the activities of the players and others involved in the game of Cricket. The BCCI could not be brought within the ambit of "other authorities" under Article 12 of the Constitution, the court said. It went on the specifically mentioned that BCCI cant be treated as ‘State’ or in other words part of government.
The above ruling should be enough to establish that BCCI has no right to ‘ban’players who join ICL and in no case playing for ICL can disqualify a player from joining the Indian Cricket team. BCCI’s stand that players who join ICL would be ‘banned’ for life or disqualified should be reversed and BCCI representative who have make similar comments in media should be banned for life from BCCI. They are trusted with the job of promoting Cricket and not curbing Cricket in the country. It’s Supreme Court and Government of India responsibility to make an announcement to this effect immediately even if no PIL is filed. As I understand, BCCI is a non-profit making entity which has been formed to promote Cricket in India. In no case it has any extra constitutional powers to ban any player to play on other platform. (The disciplinary power BCCI exercise over players comes from the contract signed by players with BCCI and not from BCCI status. They have no powers or right against wannabe Cricketers who have not entered into any contract with them). It’s like movie federation declaring that anybody who participates in Indian Idol would never get a chance to work in Indian Movie. It’s completely absurd. At best a movie producer say Yash Raj productions can say that anybody who work for a Sony Entertainment Network production wont get chance in its movie. He has right to do that because it’s his movie and his money. But in no case he can ban the singer from Indian Film Industry.

This is why competition is very important. Today BCCI is run like a family owned business where the trust representatives act on their own wimps and fancies. Its like Yash Raj productions owning the whole Film Industry. Infact in a democracy like India every field should work like democracy and monopoly should not allowed in any form. Let each TV channel has its own Cricket competition. The viewer’s popularity will force the selectors to choose the right candidate and not ignore good candidates. It may not ensure selection of the best 11 from a country of 110 crores but it will ensure that India is never short of options. It will give platform to wannabe Crickets to play against the other good players in the country and viewers will be entertained. If a singing competition like Indian Idol can get such talent & sponsorship Cricket clubs like ICL will never be short of money or talented teenagers.

Mr Sharad Pawar: You have been advocating democracy and public choice all the while. Now it’s your turn to prove that. Allow democracy in Cricket.

Why DLF IPO is Doomed

2007-05-30T16:21:00.000+05:30

The big bang DLF IPO is here again. The price band is Rs. 500 – 550 per share and is offering 17.5 crore shares for subscription. At the upper end of the price band the issue hopes to garner Rs. 9625 crores!!!

And again my prediction is that it won’t be successful. I don’t believe in the real estate valuations and that I have stated many times earlier here. Today I will not talk about valuations. I believe, The size of the IPO is enough to kill itself.

Analysts are wrongly comparing DLF IPO to RPL IPO. They are trying to sell the point that if Indian market can absorb RPL IPO it can also absorb DLF IPO.

Let me argue to the contrary.

First – DLF is no Reliance

Reliance has a 30 year track record of rewarding its shareholders and Dhirubhai Ambani is known as father of equity cult in India. RPL’s parent company had a shareholder base of 35 lakh shareholders (It’s a record; every 4th investor in stock market is a shareholder of Reliance). RPL IPO saw a mad rush for opening D-Mat accounts among non investors. DLF can’t even hope for anything similar to that. DLF is not even TCS, ONGC or ICICI bank.

Second – It’s a Myth that Reliance Petroleum raised 8100 Crores from market through IPO

Fact: RPL has reserved 90 crores shares for RIL of the total 135 crore shares on offer. Which means the net size of the IPO was only 45 crore shares or Rs. 2700 crores.

Third – Not enough retail investors

I believe, everyone one will agree that if Retail part of the issue is not subscribed fully there is negligible chances of upside when the issue lists.

Now let’s do some number crunching.

DLF IPO size is Rs. 9625 crores at the upper end of the price band and is offering 17.5 crores shares for subscription. Around 30% of the issue would be reserved for retail investor. As per the SEBI guideline retail investor can invest maximum Rs. 1 Lac per IPO. Hence if all applicants apply for maximum permission number of shares it would require around 3 lakh applications. Generally less than 1/3 of the applicants apply for maximum permission number of shares. In case of RPL issue it was around 32%. Going by the weighted average method it would require at least 6 lakh retail applications to fully subscribe the retail part of the issue.

Yes, RPL IPO was oversubscribed by around 13.8 times. It meant that total money retail investors provided was Rs. 2980 cr. (16*13.8*45cr*30%). At 100% retail subscription, DLF is hoping to raise Rs. 2888 cr (9625*30%)!!!!

Fourth – Where is the upside?

Even if the IPO managed to escape through like the Cairn India IPO and manage to somehow show 100% subscription by retail investor’s what’s the point of investing? Retail investor would like to invest in an IPO only if he is hoping that the IPO would be oversubscribed many times over and hence would command premium in the secondary market on listing. As shown above it’s very difficult that the issue would be subscribed completely. Hence I don’t see any possible upside in the issue.

Fifth – bad marketing

The one year listing drama has done enough damage to the issue. It can’t command the same confidence it would have a year back. Secondly rumors like – Ambani brothers have joined hands to make sure that DLF IPO is not successful is doing no good for the IPO. I don’t buy the logic that Ambani brothers are interested in relative market cap of DLF with RIL market cap already 2.5 times and RelCom market Cap also more than that of proposed DLF market Capitalization. Such rumors can only harm the issue. Very few like to bet against the Ambani at least on the stock market. Again news of leading i-bank deserting the ship is not taken positively by the market.

Sixth (the most important) – Valuation

Boss, look at the top line and bottom line figures. Do you think public is idiot??

My recommendation to retail investors

Don’t even think of investing in this IPO. And those who are planning of investing in other companies in the secondary market in the next 10-15 days please hold on to your horses. Check out the fate of the DLF IPO & its impact and then enter the market.

Anil Ambani the Entertainment Czar

2007-05-05T13:19:00.000+05:30

Couple of points I made in my earlier blog which I would like to repeat here –

1. Few years down the line 90% revenue of Reliance Communications would come from non voice business
2. The strategic advantage Reliance Communications has over its competitors is the fat optic fiber backbone (90000 Kms. In India + Flag’s multi-country infrastructure)
3. Anil Ambani might not do well in power sector but Capital and Entertainment (extension of communication) suits his aptitude and skills

Now read this article. http://inhome.rediff.com/money/2007/may/05spec.htm. Its one of the best business article I have read in recent times where the author has taken pains to collect maximum possible information, understand the business, analyze and then write the piece.

Unlike his elder brother, Anil is following a very different strategy but with the same ultimate goal of ruling the industry. Mukesh Ambani is more of a Greenfield person who builds from scratch to rule the sector. He has the whole blueprint ready in front of him before he inters the sector and he has everything chalked out on pen and paper – the ultimate goal, the road to take etc etc. He is Rahul Dravid of Indian Industry – Mr. Dependable. Anil Ambani on the other hand is Gilchrist – the Improviser. He knows where he wants to go and he is ready to take risks. He doesnot have route map chalked out but he is confident that as he move along the roads will appear or he will make one. The goal clarity is very much there.

Right now what Anil Ambani is doing might appear like a jig saw puzzle with pieces not falling in place. But once you are able to get hold of the common theme – which in this case is the fat optic fiber infrastructure – the picture will become very clear to you.

If Mukesh Ambani was bullish on ‘Information’ (or data services) as the ultimate leverage point in Communication industry (that’s why he named his company as Infocomm – Information + Communications), Anil is bullish on Entertainment.

Anil is very clear that content is what would help Reliance Communications differentiate itself from any communication player and he know that the optic fiber infrastructure his company has places him in the best position to leverage it.

Let’s read the Rediff article and try putting all the pieces of the puzzle together.

1. Movie Screens – Already ADAG has bought out Adlabs and adding screens at rapid pace to emerge as the leading cinema exhibitor in India.
Strategic Advantage – The optic fiber infrastructure can help him deliver movies without the prints. Each print cost Rs. 30000-40000 and is one of the biggest limitations to grand all India release. The optic fiber delivery mechanism can not only help cutting cost but also increase reach, cut piracy and help early recovery of money by simultaneous release in maximum number of theaters.

2. IPTV – As mentioned couple of times earlier on my blogs it’s the technology of the future. Unlike Cable Tv and Direct to Home (DTH) it’s a two way communication system for television and would put it other rivals to shame once it catches up.
Strategic Advantage – Again, the optic fiber infrastructure. The last mile infrastructure would help deliver voice, broadband & cable Tv etc. on the same cable.

3. Movie Making & Stakes in TV18 & TV Today– Know ultimately content would be the king and would not like to see these content providers call the short while his business is reduced the distribution. Again it’s Anil style to buy rather than build.
Strategic Advantage – Again, optic fiber infrastructure. With Indians spread across the globe there is huge unsatisfied demand for Indian content. These NRIs are willing to pay for Indian content but don’t have access to it due to uneconomic size of Indian population in these locations which make reaching out to this target audience uneconomical for the content providers. Reliance has Flag infrastructure through which it can beam these content directly to NRI houses at much less cost and without much competition. It’s a huge market whose potential nobody has studied till date. Movie on demand, IPTV, India Calling, Live telecast of personal events over net etc are potential revenue generators.

4. Gaming – Zapak was a great launch and its being properly backed by media blitz, high profile game, gaming cafes etc. It’s a big industry world wide with little competition in India.
Strategic Advantage – Again, optic fiber cable infrastructure. Online gaming is something which is still totally unexplored in India and relatively unexplored around the world. Rel Com has the potential to give competition to X-Box and Playstations as the infrastructure it has (Flag) is unmatched in the world.

What makes it interesting is nothing like this has even been tried before anywhere in the world. No telecommunication company had tried to marry entertainment to communications in such a big way. Apart from failed attempts like AOL buying out Time Warner there are few precedents of any such vision. But then Reliance / Ambani are known for this. Nobody in the world has done backward integration from Textile to Oil Exploration like they did. This Anil Ambani vision for Entertainment industry is trying to repeat the same in Communication & Entertainment industry. With optic fiber infrastructure like Flag’s 65000 Rkms undersea Optic Fiber Cable (OFC) and Point of Presence (PoP) in 28 countries across 5 continents and Reliance Communication’s 90000 Kms domestic OFC infrastructure my money is on Anil Ambani.

However, the challenge for him is to find few professionals who can help him execute his vision. He has finance expert or deal makers as team members who can recognize & buy out the right pieces required for his game plan but his team lacks the professionals who can put these pieces together and make the whole thing run as a single integrated unit.

Myth: US slowdown would lead to slowdown in India

2007-04-28T16:18:00.000+05:30

All articles related to Economy growth make one basic assumption that – As US is one of the biggest consumer, growth of India and China are hugely dependent on US economy and if the US economy runs out of steam Indian and Chinese economy will also suffer badly.

However, I believe it’s the contrary. If the US economy suffers from a sudden slowdown the biggest gainer would be India. However China might suffer.

First we need to understand the nature of export from these two countries. China is basically exporter of consumer goods like textile, toys, electronics etc. In times of slowdown these are the goods which face sudden drop in demand and China might suddenly face a situation of excess inventory and no demand. It might have to cut down on production leading to erosion of economy of scale and unutilized capacity.

On the other hand, India’s major share of exports is software which is more of a business good rather than consumer good. When an economy suffers a slowdown all companies are forced to cut cost and resort to outsourcing if it can help cutting cost. And IT intervention is the best way to cut cost in any business process. People will loose jobs in US and these jobs will shift to places like India which can do the work cheaper. During these periods it’s a matter of survival and political opposition against outsourcing is put on back burner. My gut feeling says that new IT intervention & outsourcing increases during times of downturn. I don’t have the figures to back my opinion but didn’t India establish itself as a software power during the Y2K downturn?

India’s growth engine is running on domestic demand fueled by increased earning in the hand of Indian professionals. As downturn should lead to more jobs flowing to India, disposable income of Indians would increase and hence economy would keep on growing.

In my opinion downturn of US economy is not something to be feared, it’s rather something to look forward to.

Reliance Retail is not about Retail - it’s about Sourcing

2007-01-19T13:16:00.000+05:30

If Reliance Retail was all about retail then why would Reliance sell goods as wholesalers to petty retailers who would then compete with its own retail outlets for retail sales? Yes, apart from selling agricultural outputs through its retail chain “Reliance Fresh”, Reliance is also selling goods to retailers at wholesale rate through its subsidiary Ranger Farm Pvt. Ltd.

Every time Reliance enters into a new business people wonder what competence they have for the particular field to be successful. Same questions on core competence were raised when Reliance entered Infocomm business. That time Anil Ambani replied:

“….Our core-competence is Global sized project management, ability to manage the environment and ability to raise cheap finance …bus…..After Jamnagar, Infocomm is like Viagra for our project implementation team ” – Anil Ambani

Since then Reliance has proved its critics wrong and Reliance Infocomm (Now Reliance Communication) has been one of its biggest success stories and is one of the top ten by market capitalization on the Indian stock exchange.

Critics commented that unlike other Reliance businesses Telecom is a customer facing, competitive business and Reliance has no experience in such customer facing business. What people didn’t realized then that Reliance was not entering the Telecom business it was entering the Infocomm business. Reliance’s core-competence is mega infrastructure creation and in Infocomm business too it was doing just that, unlike its competitors. While other telecom operators were fighting for licenses Reliance was silently building 80,000 kms of world class optic fiber backbone infrastructure which it later planned to leverage for its telecom and other information and telecommunication business. The basic strategy was clear – Make huge capital expenditure in efficient and time bound manner, minimize operating expenditure, add to that economy of scale and vertical integration. Result low per unit operating cost at high volumes of operation.

Reliance is doing the same in its retail business. Reliance retail is not about retail it’s about sourcing. And unlike other retail companies Reliance focus is on agricultural products retail – fruits and vegetables. Ofcourse it would operate in all forms of retail but the focus clearly is ‘Fresh’.

“There is more arbitrage opportunity in Agriculture than in Software”

– Mukesh Ambani (Money Life Magazine)

Reliance has started its retail offensive with launch of Reliance Fresh in Hyderabad. It was followed by launch in Jaipur. Soon it would be launching Fresh stores in NCR and Chennai.

If in Infocomm it was optic fiber infrastructure they were betting on, in Retail it’s the logistics infrastructure they are betting on. India has a major problem with its logistics infrastructure. And in problem lies opportunity. It might sound cliché buts it’s very true – let’s discuss how.

All competitors of Reliance in retail business would be facing the same logistics problems which Reliance would be facing. The problem list includes:

1. Outdated agricultural techniques
2. Presence of too many intermediaries
3. Absence of economy of scale
4. Lack of roads to transport goods
5. Unorganized trucking business
6. Inefficient railway system – PSU style operations
7. Lack of cold storage infrastructure
8. Lack of proper warehouses
9. Other form of transportation relatively unexplored
10. Absence of good ports
11. Absence of cargo airports
12. Inefficient & restrictive tax system

Now lets us look at some of the core competences Reliance has:

1. Project implementation skills
2. Finance power
3. Capability to ‘Manage the environment’
4. Vertical integration

Other key advantages it has
1. Scale of operations
2. Confidence in group capabilities
3. Out of box thinking / visionary leadership

If we match the problems with Reliance’s core-competence and its other key advantages we get the following result

Problems - Skills of use (Control)
1. Outdated agricultural techniques - Scale of operation, finance, project implementation (Medium) 2. Presence of too many intermediaries - Vertical integration, Managing the environment (High)
3. Absence of economies of scale - Scale of operations (High)
4. Lack of good roads to transport goods - Project implementation, Finance (Low)
5. Unorganized trucking business - Project implementation, Finance (Medium)
6. Inefficient railway system - Project implemtation, Finance, Managing the environment (Medium)
7. Lack of cold storage infrastructure - Project implementation, Finance, Scale of operation (High)
8. Lack of proper warehouses - Project implementation, Finance, Scale of operation (High)
9. Other modes unexplored - Visionary leadership, Scale of operations (High)
10. Absence of good ports - Project implementation, Finance, Scale of operation (High)
11. Absence of cargo airports - Project implementation, Finance, Scale of operation (High)
12. Inefficient & restrictive tax and laws - Managing the environment, scale of operations (Medium)

This shows that Reliance has a sustainable competitive advantage over its competitors. Very few competitors can match Reliance on most of the skills.

It might make us feel that Reliance has unfair advantage over others. But if you think that way you are a pessimist / communist. There is a positive way to look at this. Till date whenever Reliance entered any sector it lead to rapid economic growth in that particular sector and one or two associated sector. But this time many sectors are going to be effected by this initiative. It will revolutionize many sectors like – agriculture, road, rail, sea transportation, aviation, warehousing etc. It opens sea of opportunity for all of us to start our own businesses associated with these sectors. And that’s why Newsweek recently mentioned that Mukesh Ambani might just spark the next Asian boom. People who have guts would get into associated businesses and prosper, rest would cry foul at Reliance’s growth.

Movie Review: Guru

2007-01-17T13:17:00.000+05:30

First of all I would like to admit that I was wrong when I said that the name of the movie ‘Guru’ is not appropriate. I also acknowledge ‘Villager, Visionary, Winner’ fitted well with the theme of the movie. I didnt knew that he plan to deny resemblence to Dhirubhai Ambani's life.

No doubt the movie is 'inspired' from the life of Dhirubhai Ambani. Abhishek Bhachchan claims that he fainted when Mani Ratnam offered him the role. Abhishek - did Mani narrate you the whole story over phone before you could faint or Mani just said "I am making movie on life of Dhirubhai Ambani and I want you to play the lead role?"

Abhishek Bachchan was amazing in the movie and I am sure it would be one of the finest moments of his career. The way his look has evolved throughout the movie is just amazing and the credit should go to Mani Ratnam. Mani sir you are just amazing.

On the negative side, as feared too much importance was given to personal life. Vidya Balan’s character was not required and Ashwariya’s role could also have been shorter. I felt that there were two songs too many – specially the bhang song.

I felt that more importance should have been given to his business achievements, the regulatory environment in which he worked etc. It appeared from the movie that Dhirubhai's biggest achievement was making middleclass / shareholders rich. How can somebody miss Dhirubhai’s biggest achievement - the Jamnagar refinery and its implications for the country? I feel there is a fear among today film makers that Indian audience donot have appetite for anything else but romantic movie. To some extent the biopic was reduced to a romantic movie to make it commercially successful. I think that is lack of vision on the part of movie makers. If 50 lakh people are willing to apply for Reliance IPO I am sure these people are ready to watch a movie too based on him. I am not advocating making a documentary, but I believe Indians have appetite for biopics like A Beautiful Mind, Walk the line etc.

All in all, the movie was amazing. I heard one of the critics on one of the Tv channels complaining about the last 4.5 minute speech by Guru comparing himself to Mahatma Gandhi. I don’t understand why people consider Mahatma Gandhi so sacred. He had his black spots or gray shades. Everybody knows about his sex life, Chora chori incident etc. And compare at the result – his efforts lead to independence but also partition of India and Dhirubhai Ambani’s effort is helping India become an economic super power. I felt that the speech should have been a bit longer.

People need to understand that we need law breakers like Mahatma Gandhi and Dhirubhai Ambani. These law breakers teach these law makers what is right law and what is wrong law. And the best test of ‘right’ law is history. The fact that the same government is lifting the license Raj is proof of the fact that law was wrong in the first place.

Mr Arun Shourie’s speech is a good pointer towards that. He worked for the same newspaper which was propagating against Dhirubhai Ambani (Guru). The reporter was Mr. Gurumurthy (Madhavan) and the newspaper was Indian Express (Independent). He said

“I first learnt about him through the articles of my colleague S. Gurumurthy. The point in most the article was that Reliance had done something in excess of what had been licensed; it was producing in excess of that capacity”.

Most would say today that those restrictions and conditions should not have been there in the first place, that they are what held the country back, he said. Dhirubhai should be thanked for exceeding the limits in which those restrictions sought to impound them as it helped to create a case for scrapping those regulations, he added.

Referring to his relationship taking a turn, he said “we had all got convinced that persons like him had done the country a service. He was always direct and full of ideas about what the country should do, if only it would be allowed to do it”.

What wrong did he do if he produced goods in excess of the licensed capacity for a country which is suffering black-marketing due to lack of production. Would you complain today about a person who produces more electricity than he is licensed? Would you mind if somebody comes up with idea to increase railway capacity or if Capt. Gopinath flies more Air Deccan flights? Today we are unable to grow at the pace at which we are capable of because we don’t have enough electricity, enough railway seats, and enough airports. And the fault is that of the law makers and not the law breakers. Tomorrow if an entrepreneur builds a new airport near Mumbai or Delhi against the law he should be lauded and not punished.

We have enough capital and human resource to build the infrastructure we are lacking. What is holding back our growth is government restrictions. We have seen how scarping of license raj has helped sectors like telecom and Airlines. We need similar scarping of license raj in Power, Airports, and Mining etc.

Job in hand for government is very easy – just get aside and watch India grow. But somehow they are working overtime to restrict India’s growth.

Zapak.com – New offering from ADA stable

2006-12-25T17:48:00.000+05:30

This is one campaign in recent time which stands out. After the brand revamp of Reliance ADA group & Big FM launch I had almost written off ADA groups marketing team and Mudra advertising agency (Mudra is owned by ADA). But Zapak has forced me to think again.

Lot had been written about the ADA group’s Reliance logo and I would try to restrict myself. I think the color and font is pathetic. Only focus is on the “A” letter, and it has been done to symbolize Anil Ambani’s initials. Infact the focus on the letter A suggest that in near future he might be planning to drop Reliance word altogether and retain only the ‘A’. Rs. 700 crores was supposedly spent on the brand revamp and except for the advertisement featuring Amitabh Bachchan nothing was worth writing home about. “Infocomm” was a more appropriate word and re-branding to ‘Communication’ has just erased the distinction and limited the future possibility (I hope this is not limitation of vision). Same is the case with “Webworld”. There was no reason to change the name to ‘shop’??!! Again ‘Reliance India Mobile’ to ‘Reliance Mobile’ (in this case both versions are equally bad). I believe the only intent behind these name change was to erase big brother’s marks on the company. But he should have been more creative.

Similarly the ‘Big’ FM campaign is unimpressive. First – the word ‘Big’ itself is irrelevant. It’s like ‘Smart’ brand for the Reliance GSM service, I am still figuring out why the word was used or it was just the first English word they came across that day. Although Abhishek Bhachan’s presence had provided some visibility but I think he was not properly utilized. (Motorola did a great job with him).

Now Zapak. The work ‘Zapak’ is a well thought word. Although the word is not there in the dictionary - it communicates the gaming attitude. The colors, the font, the punchline – everything is well thought out and eye catching. And the best part is the advertisement campaign – specially the print advertisement.

My favorite is the 'toilet' advertisement below. The company has improvised on it and in many multiplexes has put stickers in toilets to this effect. Great way to catch your target audience at the place where they can’t take their eyes off. There are couple of other good print advertisements too.

Another noticeable thing is where Reliance Infocomm (sorry Reliance Communication as it is called now) is headed. Focus is no more on broadband and Netway project (Video on demand). Recent ADA moves suggest focus on GSM, Mobile stock trading and Gaming. Mobile stock trading and gaming are both what I call ‘addition business’ targeted at different age group. Infact voice (telecommunications) is also becoming an ‘addiction business’, with a specific segment of population talking for the sake of taking (Reliance communication’s - what to do with 2000 minutes campaign is indication of that). So, while the old Reliance was entering businesses where there was unsatisfied needs the new Reliance is creating demand where there is disposable income. The target population has completely changed. Mind you it’s a great strategy especially in developed world where basic demands have already been fulfilled. And of course these addiction businesses are not unsocial like cigarette or alcohol business, but provide you with loyal customers who guarantee regular cash flow.

Zapak is a big way forward and with the Reliance Webworld (sorry Reliance shop) infrastructure to back it would prove another great move by ADA. I have checked the website - C0llection of games, sorting, interface etc. is very good. A little more focus on broadband can further his interests. Again broadband is a business which need more implementation skill and is more information (or Data) oriented than Communication (Voice) oriented. MDA selected the name Infocomm because he wanted to communicate equal focus on both Voice and Data. ADA’s recent move suggests limited focus on data which might not be a great strategy considering the amazing optic fiber infrastructure the company has.

Even at $20 billion Hutch is worth it for Reliance Communications

2006-12-22T14:59:00.000+05:30

The best thing about Anil Ambani is not that he is one of the best negotiators and a financial wizard but the fact that he knows his strengths. Anil know that if he has to grow really big he has to leverage his core competence of cracking deals and Hutch deal should be the epitome of his skills.

Takeover of Hutch makes great sense for Anil Ambani. It not only provides an opportunity to enter GSM in a big way and become the biggest telecom operator in the country but it also has lot of synergies which is not available to other suitors.

Hutch has GSM operations in 16 circles where Reliance Communications (RelCom) doesnot have operations and only West Bengal and Kolkata is the over-lapping circles. Hutch has high revenue per minute and ARPUs are also better. Hutch has the advantage of operating in 800-900 Hz band in most circles, advantage which only initial operates have as all new operators are given spectrum in 1800-1900 Hz band. Hutch has around 2.2 crore high end GSM customers which added with 2.8 crore customers of RelCom will increase RelCom customer base to 5 crores.

Apart from this Hutch has premium brand image (and in all probability the successful bidder would have the rights to use the Hutch brand for around 3 years). RelCom on the other hand has Webworlds (now Reliance phone shops) spread all over the country which can act as a good retail touch point for all Hutch customers too. And above all RelCom has 80,000 kms of optic fiber infrastructure which can be utilized by Hutch to cut substantial part of the carriage cost, having direct impact on the bottom-line.

The two companies can also share each others towers and other passive infrastructure. RelCom has invited GSM equipment bid which is estimated to cost around $ 7-8 billion. RelCom by taking over Hutch would be saved this expenditure apart from getting revenues from day one. RelCom would also save on advertisement and marketing expenditure and exit of one major competitor from the market would reduce the pricing pressure. The deal would also shift the telecom market from the price war mode to consolidation mode. Having both CDMA and GSM operations would also provide opportunity to provide other value added services like dual service (CDMA & GSM) on single phone, mobile stock trading etc. RelCom can also extend the free calling to own network scheme to Hutch customers leading to increased customer pull.

The Numbers

At relative realistic Rs 35,000 per subscriber value of Hutch come to Rs. 77000 crores or $17.1 billion. Today Airtel is valued at around Rs. 40,000 per subscriber. At Rs. 40,000 per subscriber the enterprise value of Hutch is $ 19.6 billion. Hutch has a debt of around $ 1.6 billion on its balance sheet which means net equity valuation of $ 18 billion. Considering the synergy and premium for becoming the biggest player in the market $ 18 billion would be an amazing deal for Anil Ambani and even at $ 20 billion (which is little stretched) he would come out winner.

I don’t want to bore the readers hence I would not go into too much details. But I would like to state that Rs. 35,000 – 40,000 per subscriber valuation although might look steep (100x of ARPU per month) but is fair considering the growth rate of the telecom sector which is around 40% per annum. And I would like to reiterate what I have stated in many of my blogs earlier – in 5 years time voice would contribute only 10% of the total revenue and rest 90% would come from data & other value added services. Hence today the focus should be on tying up as many customers as possible. And hence I have based my total valuations on number of subscribers rather than EBITDA etc.

Competition

Others players who are being named as probable candidates are Vodafone, Maxis, Airtel and Essar. Vodafone appears to the next best candidate for the deal after RelCom.

Essar: Essar does not have that kind of money and I can bet they can’t arrange that kind of money. Infact they have stop considering takeover as an option. The option in front of them is to retain their current share or sell it out at substantial premium. Their expected strategy would be as follows:

In case RelCom is the front runner – Ask for substantial premium to sell out. They may ask for 10-20% premium per share over what RelCom pay to Hutchison for their share.
In case Vodafone is the front runner – They may dilute their stake to 26% by selling the rest 7 % at substantial premium and hope of getting even better deal later. In case they don’t get a premium over the Hutch selling price they may retain 33% which would make Vodafone uncomfortable. Vodafone to reduce the nuisance value may like to buy out Essar completely and park the mandatory 26% with some other Indian company for the time being. However, it would be difficult to find a promoter who can shell out that kind of cash. And regulator would not allow eye wash deal where the Indian promoter is just a sham.

Vodafone: Vodafone is the second best candidate in the race after RelCom. Vodafone is very keen to enter Indian market and therefore invested in Airtel. But substantial stake of Singtel in Airtel has restricted them till date. Vodafone will have to get Airtel’s no-objection as they have non-compete agreement with Airtel. However, it is not expected to be a big problem. Airtel may give no-objection in return of some financial gain or might just give it for free to increase RelCom’s problems. Vodafone on the other hand might reduce the stake only to 9.9% from the current 10% to meet the regulatory requirement. It would also keep the option alive for merger between Hutch and Airtel in future.

Maxis: Maxis donot appear to be a serious candidate right now. Secondly there is not enough synergy benefits as Hutch and Aircel has many circles in common.

Airtel: Airtel also is not serious contender. Firstly, Sunil Mittal being a first generation entrepreneur do not has the financial resources as required in this bidding battle. Secondly he has other new businesses like retail to focus his resources on. And above all as Airtel is present in all the circles there is not much synergy benefit. Infact merger would entail surrender of scare spectrum which would make merger value destroyer.

Funding the LBO

For Reliance funding the Leveraged Buy-out (LBO) should not be a problem. Reliance brand name and Anil Ambani fund raising skills is something few doubt in the financial markets. As per media reports he has already tied by with 5 banks for $ 5 billion each for this deal. And with private equity funds like Blackstone and KKR on his side Anil Ambani has little to worry on this end. (Please note – Blackstone India head Akhil Gupta was part of senior management team in Reliance Infocomm during Mukesh Ambani’s time and is a close friend of Anil Ambani).

Considering the foreign borrowing option (especially from Japan) and unlevereged RelCom balance sheet Anil Ambani might be able to raise funds as low as 6%. At 6% interest (and $20 billion loan), cash outgo annually would be Rs. 5400 crores. Cash profit for the combined entity for the year ended 2007 is expected to be 1.5x of this amount.

He might also dilute his personal stake in RelCom from 66% to 51% to fund this takeover. His 15% stake in RelCom can easily fetch him around Rs. 15,000 crores or $ 3.3 billion. I doubt that he would join hand with Maxis for the bid.

Management

Anil Ambani unlike most other entrepreneurs’ do not fancy having day to day management control over businesses and he has too many things on his plate to work full time on one business. He might retain Mr. Ashim Ghosh and his team for the day to day management however ultimate power would always lie with him and his close circle.

Roadblocks

The two major road blocks Anil Ambani need to look out for is:

Essar group might act pricy: Essar group might ask substantial premium per share over and above what is paid to Hutchison. As per the TRAI guideline no company can hold more than 10% stake in two different operators in the same circle. Hence the only option in front of Anil Ambani is the merge the two entities which would make 33% stake of Essar critical. Essar knows this very well and they know until unless they sell out this deal can’t go through. Essar may also demand 15% stake in the final entity, which going by Essar’s track record Anil might not be willing to oblige.
Regulatory hurdle: As everybody knows Anil Ambani is not in good books of Sonia Gandhi and has missed major business opportunities in the recent past due to this reason. Regulation provides enough ammunition to stall the deal if they want to. Another critical factor would be the amount of spectrum the combined entity would be allowed to retain after the merger. If Rel Com is made to surrender substantial part of the spectrum this deal might not make sense.

I wish RelCom best of luck. This deal can push RelCom to the big league and it deserves to be there. I would like to reiterate here – in 5 year time voice would contribute only 10% of the total revenue and 90% would come from data and other value added services. RelCom optic fiber infrastructure is major sustainable competitive advantage which it can leverage better once it has higher number of subscribers. Hence even at $ 20 billion Hutch is worth it for RelCom.

Just watch out for RelCom!!

New Twist(25 Dec 2006): As expected Essar is trying to get premium of 10-15% per share from Anil Ambani (ADA) as they know until unless they sell out Anil can’t go ahead with the deal under current regulatory environment.

Hence great negotiator that Anil is has come up with a new plan. The 66% stakes of Hutchison Woampoa maybe bought by the Private Equity firms combine which include – Blackstone, KKR etc. This would help ADA avoid Essar stalling the deal. Later with 66% voting right it won’t be difficult to teach Essar a lesson and force them to move out. Blackstone and KKR will ofcourse get its pound of flesh for the same and may take 16% stake in the resulting company after merger.

Essar's Bluff (Jan 3, 2007): There are news reports that Essar has managed to tie-up with I-Banks for $20-25 billion. As I mentioned before I can bet Essar cannot manage that kind of amount.
And if I-banks are really ready to lend then I request them to please read this - Essar has all its assets already pledged to lenders and their track record in loan repayment is well known. However, the biggest problem is the intent shown by the promoters. They were the first Indian company to default on foreign loan and their problems are far from over. Due to upturn in steel cycle it might not appear so but please note they have not used the opportunity to clean the house. They have restructured the old loans just to avoid being classified as NPAs.
Most important thing worth noting is - they are managing to pledge the same asset to lenders many times over and surprisingly the lenders are not noticing it. (This is glaring example of hollowness of MBA (Finance)'s course curriculum). Essar is pledging the shares of telecom holding company (Essar Teleholding Limited - ETHL) to one lender and shares of the holding's holding company (Essar Telecom Limited) to another apart from pledging shares in Hutchison Essar Limited. Ultimately underlying asset is the same and the same asset can’t be pledged twice. But somehow target oriented mindset of today’s bankers are ignoring this fact. If any bank lends money to Essar for acquiring Hutch shares it would be digging its own grave.

Mr. Chidambaram – The bubble maker

2006-12-12T15:02:00.000+05:30

The last two crashes in Indian Stock market (May 2004 & May 2006) has experienced are unique because it recovered much faster than it generally does in a crash. And the credit for that goes to Mr. P Chidambaram the Finance Minister.

Every speculative market like Stock Market has inherent tendency to build up bubble. Margin trading, F & O, derivatives are all methods to increase speculation. And all these financial innovations are nothing but a step to circumvent regulation which tries to curb speculation. As the market goes up everybody is leveraging himself to take maximum exposure hence gain maximum from the rise. But when the market falls they also bear maximum loss.

Stock markets has a system called stop loss where after a certain fall the bulls book losses to stop further loss adding to selling pressure. Added to this the brokers have to revise the margin requirement for their clients forcing them to sell at loss and adding to selling pressure. This is snow ball effect and hence it’s called a Bubble.

Mr. Chidambaram is a veteran of the financial markets and knows this very well. Hence in May 2004 after BJP lost the elections and Congress came to power, he through the government controlled Financial Institutions made sure that this snow ball falling down the hill is stopped in between hence not leading to crash. He was successful then and managed to control triggers like stop loss and margin plays. Many people who were saved in that crash should thank him. Gaining confidence from his last success he did the same in May 2006 crash and successfully again. He managed to prove me wrong for a long time (http://neerajgutgutia.blogspot.com/2005/09/stock-market-burst-is-inevitable.html ) but lets see if he can repeat it this time. He might, he might not but remember each time he does that the snow ball is building up latent energy and increases the chances of bigger fall the next time and ‘faster fall’.

My analysis says that market should not be above 9000. Lets see whether he is able to delay the bust further. Even if he is successful this time, remember is can just delay it.

Another trend worth noting is that most these crash like situation happens around the time when a high profile IPO is getting listed. (The reason of the same might be that lot of cash which was circulating in the market and building the bubble get locked up for month or so in the IPO). Last time it was Air Deccan, this time it is Cairn India. And if Mr. Chidambaram manages to hold the snow ball for a while, the next might be DLF IPO.
Sorry readers if this read like salt in your wounds but you deserve it. Remember Mr. Chidambaram by protecting you every time is just exposing you to bigger risk. I feel like humming " Kab tak chupaogi jawani o rani......"

Cairn India IPO – Fair price Rs. 120 per share

2006-12-07T14:31:00.000+05:30

Cairn Energy (UK) is coming up with an IPO for its Indian assets as a separate company Cairn India Limited. The IPO price band is Rs. 160-Rs190 and the issue is open from December 11, 2006 to December 15, 2006.

Background: Cairn Energy is an oil exploration company which sells its explored blocks to production companies once it strikes oil. The company’s core competence is exploration (and has a very good track record in that) and has negligible experience in production.

Cairn energy as it has done with other explorations around the world was looking to sell off its Indian blocks after striking oil. However greed took them in. And the credit for that goes to Merrill Lynch. Merrill Lynch’s Oil and Gas expert Mr. Rahul Dhir made a presentation to them that rather than selling off the block to one of the oil companies, Cairn Energy would be better off spinning off the Indian assets into a separate company and coming out with an IPO in the Indian stock market. The valuation expected in IPO as presented by Merrill Lynch was more than twice what Cairn Energy was hoping to get by selling the block to Production Company. Although the Cairn energy top bosses were not convinced that Indian assets can command that kind of valuation they were done in by the greed. They offered Mr. Dhir of Merrill Lynch CEO designation for the Indian subsidiary and lucrative stock options in return of leading the IPO process.

Can you imagine an Investment Banker becoming CEO of a company in a highly technical business like that of oil exploration & production? That what ‘irrational exuberance’ can do to people. The mad gold rush at the Indian stock market is providing opportunity to I-Banks and promoters to fool small investors.

I had discussion with couple of analyst in top notch Investment banking firms who have come up with research reports on Cairn India IPO. Although both of them have written in their report that the IPO is slight overpriced privately they admit that is grossly overpriced. When I asked them why they are not mentioning that it’s grossly overvalued – their response was they can’t bet against the market. They admitted such is an appetite for new IPOs that a good stock is lapped up at any price irrespective of valuation. And ofcourse a company that has stuck oil cannot be a bad company. But the question is VALATION??

Few things that need to be highlighted which has not been properly highlighted:

1. The company has almost no experience in production. The company’s core competence is only exploration
2. The company rather than having a technical person as CEO has got an investment banker as CEO. Not only would it be de-motivating for operating personnel it would also hamper the operations. Expect change in management soon after the IPO.
3. The promoter is not interested in the production business. Expect no management support and possible stake sale in the near future.
4. MRPL or ONGC has not given any firm commitment regarding offtake of crude produced. Refinery plan at the well head has already been put into the dustbin. The quality of crude makes pipeline transportation difficult as the crude solidifies in the pipeline if the required temperature is not maintained. Hence transportation would be a costly issue and it need to be solved immediately so that pipeline infrastructure is ready at the time of start of production. Considering the situation right now, it seems that it would lead to delay in the project.
Comparable crude trades at a discount of Brent crude price. The discount rate is currently around 20%. In India only Essar and MRPL refinery apart from Reliance Refinery is capable of handling such crude. Considering the transportation problem, geographical location of plants and relative strength of players my bet is – Cairn would on its knees sell the crude to Reliance at a heavy discount. (This is if they don’t sell out of the project completely before the production starts).
5. ONGC has disputed the claim of Cairn India that they are not liable to pay the cess. ONGC has claimed that Cairn India would have to pay 70% 0f the cess as they hold 70% stake in the block.
6. Cairn Energy would not be using the proceeds from the IPO for capital investment. The money would flow out of India to the parent company and its shareholders.

How I-Banks fool us

“Chor – Chor mosere bhai”. This is the only explanation I have to explain why other I-Banks are not coming out with a negative report on Cairn IPO. Couple of points worth noting in the Macquarie report:
1. To reach at Enterprise Value / Reserve multiple of 12.5 they have divided the total market capitalization of international oil companies by reserves. However total market capitalization includes valuation due of refinery and marketing assets also which has been ignored. (Infact it’s a goal seek calculation. Just to justify the valuation of Rs. 160 – 190 this mistake has been committed knowingly). Real multiple should not be more than 6.5 as that of ONGC. If same multiple is used for Reliance oil & gas assets valuation, the oil and gas assets of Reliance alone should be valued at Rs. 1,35,000 crores!!!
2. Secondly, each such exploration contact has some government share (In this case it ranges between 20% and 50% depending on cost recovery). Valuation should be discounted by same percentage.

When you discuss the same with these I-Banks the only argument they have to defend their recommendations is not valuations but the fact that Petronas has taken 10% stake in pre-IPO placement @ Rs. 176.5 per share. For Petronas this might be a hedging option or a “getting your foot in strategy” to pre-empt any other bidder for the assets. Or there might be some fine print to the deal knowledge of which is not available in public domain.

Anyhow not going into too much detail, my conclusion is:

1. You will get an opportunity to buy Cairn India shares at a price around Rs. 120 atleast once between listing and start of production.
2. If you want to take an exposure in exploration business you would be better off buying Reliance Industries shares.
3. At IPO price the shareholder would not end up losing only under two conditions. Either oil prices sky rockets by atleast 30% or Cairn India strikes more oil.
4. Don’t be surprised if SEBI pulls them up or if IPO price is revised downwards

Anil Ambani – No lesser God

2006-11-23T20:24:00.001+05:30

These days the first comment people have after reading my blog is – Its very anti Anil Ambani. Boss, I must clarify here that he is son of my ultimate God and I no way doubt his competence. I have stated earlier also on my blog and again I am stating here – He is potential “Warren Buffet from India”.

In my earlier blog – “How can you worship Reliance of all things??!!” I had explained that interests are like a religion and everybody has the freedom to follow the religion of his own liking. I follow the religion ‘Infrastructure’ hence I admire Mukesh Ambani & his unmatched project implementation skills more. It doesnt mean that I dont respect any other religion.

Anil is God of Finance. His core competence is different which does not make him a lesser person. And if I am correct, there are ten follower of Finance as a religion for every one follower of Infrastructure as a religion. I have mentioned earlier also that watch you for Reliance Capital Ltd because it’s where Anil Ambani’s heart is. One of the first comments he made after getting control of the four Reliance companies was “I want to make Reliance Capital among the top three companies in the private financial services and banking sector in India. Reliance Capital will become a full service financial services company.” It’s where his heart is. Did he make any similar announcements for Telecom or Power business? And I believe no matter what they teach us at MBA schools, business is very much about heart (and vision comes from there only) like anything else like relationships etc.

Yes, I doubt his project implementation skills. But there are reasons to it. The first and the foremost - his ‘historical blunder’ of getting too close of Samajwadi Party. Who else but a Ambani should know the importance being politically neutral. Second, which is more fundamental in nature, his lack of ‘hands on’ approach. I personally feel it’s difficult to implement Reliance size infrastructure projects without hands on approach. (I might be wrong but that is what I believe right now).

I doubt that Reliance Communications would do great things under his leadership and because I am obsessed with Reliance Communications I end up criticizing him quite often. Same logic goes for Reliance Energy also where I feel he has pushed himself on the wrong side of the ‘current political power’ and without political support you can’t manage in a sector like power sector which is in great mess due to political reasons.

But then not everybody needs to do everything. Reliance Capital i.e Finance is a big enough business (Banking, Insurance, Mutual funds etc etc) to keep him occupied for his life time. That’s why I have been advocating that he should sell out of Infocomm. Not only he will be richer by atleast Rs. 50000 crores which can be utilized to fulfill his Reliance Capital dream but that way Reliance Infocomm (Reliance Communications) would also be able to perform to its potential.

I wish the two brothers had not separated. They were just invincible together. One amazing Project Implementer and another Finance Wizard!! But that was not to be:( Since they have separated they are hell bent to prove that two Reliance is better than one. I wish they manage to do just that.

Guru – The Movie

2006-11-06T00:22:00.000+05:30

Was just watching the music release of Guru. Mani Ratnam’s next movie with Abhishek Bachchan and Ashwariya Rai. And rumors say it is based on the life of the legendry Indian businessman – Shri Dhirubhai Ambani.

The punchline of the movie is - “the most controversial man of the year”. Well, if its really based on his life than the punchline should be “the most controversial man of India”.

I saw the poster of the movie it reads – “Villager, Visionary, Winner”. Well these words can be used to describe Dhirubhai but these three words together not exactly describe him right. The word Visionary fits him best but the other two words just take away the impact (may be its there for commercial reasons). And where did the word ‘Guru’ came from? Well he has been inspiration for a whole generation of entrepreneurs but then word Guru is also not very apt. I describe him as just ‘God’. If my choice of word offends people they can call him ‘God of big things’.

Maniji I am a big fan of yours and I believe Abhishek is the best choice for the role. You managed to bring out the best in Jr. B in your movie Yuva much before anybody else did. It was the defining moment in the career of Jr. B and your next movie might be ‘the’ moment he was born for. I hope you & Abhishek do justice to the life of the great man. Please don’t waste too must screen time on Ashwariya & other commercial aspects and make it like a real biography as done in Hollywood (Use ‘A beautiful mind’ or ‘Walk the line’ as benchmark). I envy you because I wanted to be the one to make movie on his life. I will still make movie on his life one day. I hope you set a high benchmark for me. Waiting eagerly for your movie.

Revolution every 4 years

2006-11-02T15:49:00.000+05:30

The thing that separates Reliance from any other company is its ability to enter & revolutionize a new sector every 4th year. In late nineties it was the Refinery (Jamnagar), in early 2000 it was Infocomm, then Oil and Gas exploration and now Reliance Retail (Reliance Retail initial pictures below). Next would be Mega cities (SEZ).

Added to that, they are bringing down the ‘new revolution time’ with each project. Currently they are working on 5 mammoth projects - mammoth for any company anywhere in the world.
1. Reliance Retail (Rs. 27000 crores)
2. Reliance SEZ (Rs. 50000 crores)
3. Reliance Oil & Gas exploration (Rs. 35000 crores)
4. Reliance Gas pipelines (Rs. 15000 crores)
5. Reliance Jamnagar Export Refinery (Rs. 27000 crores)

Which company in the world can take up the project of building world’s third biggest refinery in record target time and still manage to leave it on auto pilot? I doubt even Exxon and Cevron of the world can do that. But for Reliance’s top management its “been there done that”. They have bigger things to concentrate on.

In my earlier article (Stretch & Leverage ) I have mentioned – ‘They operate on the general military philosophy that no matter how strong you are you never open too many fronts for war. And when at war your best people are out there fighting the war while home affairs can be looked into by lesser mortals.’ Today they are so confident that they are opening 5 fronts at a time. It’s this “guts” that separate Reliance from others. Only other company which I believe can match up with Reliance in terms of “Guts” is Google - which also has a habit of creating revolutions at regular interval.

P.S - Writing the word Revolution with ‘s’ in the end is making me wonder whether I am using the word revolution too loosely but then I believe calling these projects anything less than revolution would be insult to these projects.

Reliance Communication's judgement day!!

2006-11-01T16:42:00.000+05:30

I had been asked often why I am so bullish on Reliance Communications (Estwhile Reliance Infocomm). I always said its beyond Communication and the Infocomm word was the right word to define it. Although Anil has removed the word from the name of the company thankfully he has not changed the company plans.

Read this link. It might well be the the start of the revolution I had been waiting for:

Its cable tv, telecommunications, broadband (and much more)all rolled into one.

There are parts of the article which I am not clear about and would ask Reliance Communication to clarify:
"The global operators we are going to sign, in turn, are appointing franchisees which are the cable operators and they move into each and every home and office", Tambe said. "We are launching simultaneously in India and some other countries, including the US".

Now its test of Anil Ambani's implemetation skills. He has the killer application in his hand, he just has to make sure that he price it right and push aggressively to reach critical mass.

Anil Sir, wishing you success.

Privatize coal mining – what matters is efficiency

2006-09-08T12:07:00.000+05:30

I belong to the coal capital of India – Dhanbad and it makes me really sad that every time I hear about Dhanbad in national news it’s about some mine tragedy.

Do you know - for the last 25 - 30 years major chunk of underground coal resources near Dhanbad is burning and getting wasted and government has not been able to control the fire. In fact they are not even trying to control it. It’s like letting oil well at Bombay High burn its resources.

Bharat Coking Coal Limited (BCCL) must be the biggest white elephant under government of India but somehow nobody cares because it not a corporate but a department. Even an idiot can tell you that such waste of resources in a country that is dependent on imports for its energy needs is blasphemous. On one end there is a major political battle going on in Orrisa whether we should allow foreigners to own our resources and on the other end we are letting our natural resources burn to ashes. Can you believe it - coal capital of India is importing coal from countries like Australia and China and using alternative sources like petcoke.

A proper audit of BCCL will reveal many skeletons in its cupboards.
1. They are showing coal stock of crores in inventory while actually they have nothing but stones lying there
2. Purchase of spares and parts are done at a price which is 30 – 40 times the cost price. (I know that because my friends are in the business of supplying parts)
3. Illegal mining is rampant and most of the politicians are the biggest beneficiaries

We need to learn there is no alternative to efficiency. If a foreign company is more efficient is mining then let them do mining and take a good share in their exploits through profit sharing agreement. No point wasting resources that cannot be renewed. And when we are ready to let foreign companies enter oil exploration in India why not coal mining?

The policy of limited exploration rights to corporate for captive consumption is another fraud by Indira Gandhi (who nationalized coal mines in 70’s) and corporate like TATA group.

Lets there be open bidding like in case of oil exploration and have revenue share agreement. We can’t complain about energy resource cost at one end and waste resources like that on the other. Sonia Gandhi do you have the guts to correct your mother-in-law’s mistake?

Anil Ambani in Kolkata!!

2006-08-23T15:35:00.001+05:30

Anil Ambani is in a very difficult position these days. His historical blunder of aligning with Samajwadi party has put him in bad books of Sonia Gandhi. And with Congress in power at center Anil Ambani is finding it difficult to do business anywhere in the country. He has already lost the Delhi & Mumbai airport and things are not looking very bright for Dadri power project either.

But now he has found a solution. CPI (M) is a perfect partner for him. First CPI (M) has good equations with Samajwadi party in general and Amar Singh in particular. Second CPI (M) is looking for corporate investments and considering its communist history few are willing to take the bait. Third and most important is the dynamics of Congress and CPI (M) relationship.

CPI (M) is natural rival to Congress in West Bengal and hence will never be comfortable in bed with congress at center. CPI (M) by nature has to oppose all economic development measures that the congress government takes but at the same time it knows that it cannot take back support for the time being. On the other hand congress is also not very comfortable with CPI (M) as partner but knows that CPI (M)’s support is critical to continue ruling the center.

Hence it’s the only ray of hope for Anil Ambani. If he invests in West Bengal the CPI (M) government would be more than willing to roll out the red carpet as they would be able to showcase his big ticket announcement to attract other investments. Secondly they know Anil Ambani is in bad books of Congress/ Sonia Gandhi and so it’s a good way to show their defiance without confronting them head on. Sonia Gandhi/ Congress would also like to ignore it as they would not like to spoil their relationship with CPI (M). For Anil it’s the only place in India where he can do business in peace without fear of Sonia Gandhi looming over his head.

How can you worship Reliance of all things??!!

2006-08-23T00:14:00.000+05:30

Today I will answer this. I am sick of everybody asking me this question. Nobody is able to understand how I can worship a company in the first place and that also a company like Reliance that unlike Infosys and TATA group is infamous for its business style.

Everybody has a religion and a God. I am not talking about the religion one is born with but the religion one is passionate about. And, as far as I know, India has three major religions – Cricket, Cinema & Politics.

Cricket is like the Hindu religion. You have an extensive list of Gods to choose from; led by the holy trinity of Sachin Tendulkar, Kapil Dev and Sunil Gavaskar.

Cinema is another religion that is not far behind when it comes to the list of available Gods to worship. The most obvious choice being Amitabh Bhachchan followed by the others like Sharukh Khan and the rest.

Next comes Politics. Its like the Muslim religion – Acts of select few has brought bad name to the whole religion to an extent that a major section of the society looks down upon this religion and wish that religion should be banned altogether. But yet is a very powerful and influential religion that would last till the end of mankind and we can’t ignore its existence. And like all religion it also has its share of Gods. Mahatma Gandhi being the biggest one having the stature like that of Prophet. Most others are small time leaders who pop up on the scene from time to time, few of them by leveraging Gandhi’s name.

I donot belong to any of these major religion. I belong to a minority religion called “infrastructure”. I know most of you have not yet heard of this religion. It is a very small religion with very few followers and unlike a few other religions we do not believe in forcibly converting people.

What is this religion all about? This religion believes that only real development of India is possible by improving infrastructure. It believes lack of infrastructure is the biggest bottleneck and the only thing that is not allowing this country and its people to live up to its potential. This religion aim to create state-of-art infrastructure in the country and give its people an opportunity to take on the world. This religion also believes that infrastructure can be built without any subsidy, just on commercial terms. All it requires is - government should not create artificial road blocks like taxes, licensees etc. All we want from government is to stay off as they did with the software industry in the initial phase.

Now tell be what options do we have for God of Infrastructure.

A company that built the world’s biggest & most efficient petroleum refinery making India net exporter of petroleum products (most of us have forgotten what oil shocks did to our economy to appreciate that).

A company that had guts to create 80000 kms of optic fiber infrastructure in matter of 12 months linking each and every corner of the country and making telecommunication affordable for the masses.

A company that would provide solution to electricity problem, a problem that should have been solved long back.

A company that is building cities that will give Indian an alternative to Mumbai and its crumbling infrastructure. (I still don’t understand how people manage to live in a city like Mumbai. Traveling everyday for hours just to reach office in crowded dilapidated trains in conditions that are not fit even to carry animals).

A company that is creating retail infrastructure that the whole country is waiting for.

A company that is building ports, roads, airports, power plants, cities and everything that government should have done long back but failed to do.

As far as I can see there is only one God of Infrastructure – Reliance or Dhirubhai Ambani, the man who created this company. And that’s why I worship him.

Anil sir – don’t mind but I doubt your project implementation skills

2006-07-22T16:41:00.000+05:30

Anil Ambani has matched Mukesh Ambani project by project at least in terms of size and announcement since the demerger. But we need to see whether any of these projects would see the light of the day.

Dadri project – ADAG group plans to make one of the biggest gas based power project in Dadri in Uttar Pradesh near New Delhi. The project is expected to generate 3740 MW of energy is estimated to cost in excess of Rs. 10,000 crores. However with current gas prices ruling at around $ 6 mmtpu, long term sustainability of any gas based power project is under question. Secondly the plant is expected to start production in 2009. To achieve that feedstock (gas) source need to be finalized and pipeline need to be built to transport it from well head to the plant. However no work on the pipeline had began and pipeline would take at least 3-6 years to build. Mr. Anil Ambani, can you please explain how you plan to run the plant in the intermediate period?

Secondly to transport gas from well head in Krishna Godavari basin to Dadri it would cost at least $1 per mmtpu. Why not build a gas based power plant near the well head itself. There is no dearth of demand for electricity in that area.

Hirma project – And if one project was not enough, he has made another mega announcement. He plant to build 12000 MW coal based power plant at a cost of Rs. 60,000 crores in Hirma Orrisa. In fact the undivided Reliance group had plans of coal based power project at Hirma but later it was shelved. ADAG has just revived the old project and made it even grander. BSES’s (now Reliance Energy) electricity distribution companies in Orrisa are already in shambles. Again in this project feedstock would be under question and we need to watch whether he can manage long term contract for coal for the plant with the Orrisa government.

ADAG group’s new punchline is ‘Think Bigger, Think Better.’ Mr. Anil Ambani you surely are thinking bigger but I doubt you are thinking better. You need to be more creative with your ideas. You also need to Think ahead in terms of alternative ways to meet the electricity deficit. And as mentioned in my blogs earlier distribution is the key and not generation.

And soon you would realize thinking is not the end. You need to think bigger and think better but at the same time you need to implement it. I doubt you capability to implement it. I hope you prove me wrong.

Stock Beta is a fraud concept

2006-07-22T15:40:00.000+05:30

The concept of Beta: A measure of a stock’s volatility, or systematic risk, in comparison to the market as a whole. Also known as "beta coefficient." Beta describes the sensitivity of a stock to broad market movements. The stock market (represented by an index such as the Sensex or Nifty) is assigned a beta of 1.0. By comparison, a stock which has a beta of 0.5 will tend to participate in broad market moves, but only half as much as the market overall. A stock with a beta of 2.0 will tend to benefit or suffer from broad market moves twice as much as the market overall.

There is an inherent assumption in this theory that a particular stock would move in the same ratio in comparison to market regardless of whether the market is going up or going down. However this is questionable.

A stock which is fundamentally strong should go up at more than 1x when the market is rising but should fall less than 1x when market is falling. Similarly a stock which is fundamentally weak should rise less than the market when the market is rising and fall more than the market when the market is falling.

To prove my point lets check the movement of Reliance Industries with that of Sensex or Nifty since the time the company got demerged. It is showing two different Betas. One result when market is going up (which is more than 1) and another when market is going down (which is less than 1).

As this inherent assumption behind Beta theory is absurd this theory is absolutely useless.

Jamnagar refinery visit

2006-07-13T18:35:00.000+05:30

People who have read my earlier blog “My failures and how I feel about them now” (http://neerajgutgutia.blogspot.com/2005/09/my-failures-and-how-i-feel-about-them.html) need to read this.

As you know I have joined Reliance now. And as part of the induction program I was taken to Jamnagar for a visit. I couldn’t help compare the last experience and this one. Last time I traveled all the way from my home town to Jamnagar changing train thrice on the way. This time I flew from Mumbai directly to Jamnagar in Reliance’s own plane. Last time I was not allowed to enter inside the refinery gate and this time I was given a VIP pass. I was not only shown around the refinery but also the mango farm, the jetty, the township and night visit to the plant. And I must admit it was worth the wait …(5 years!!!)

One of my colleagues there at Jamnagar described it as a visit to Jurassic Park where every thing is so big that gives you a very humbling feeling. To give you an idea of the size of the plant ….

One of the oil storage tanks is as big as a football field!!

Inside one of the pipeline you can drive a Maruti Zen!!!

During our visit our guide was so regularly mentioning about different units of the plant being world’s biggest that one of our colleagues asked him to mention only when it’s not the biggest in the world.

That was size…but the most interesting part is the efficiency. Most plant operates at 130 – 150 % of their rated capacity. And when you ask them how is it possible you are looked at as if asking – isn’t that expected?

And the experience ….

The 4 km long jetty over sea is a great drive. You feel that you are riding in air just above the sea with fresh air hitting your face and nothing but sea all around you. I wish I was allowed to drive there :(

The mango farm with 1000 or so variety of mangoes is something worth watching too. You can see mangoes of different color (including brinjal color) and sizes. The surprising part - the height of none of the mango plants was more than mine. In mango plantation too you can experience Reliance trademark innovation. The productivity is many times the benchmark. They have used in-house technology for retaining moisture, watering etc. to increase productivity per unit of land.

The township is not only well planned and big it also state of art. To just give you an idea – it has a floodlit cricket field inside it!! Apart from that of course you have hospital, school, club, temple etc.

The rail terminal had capacity to load 64 racks at a time. The truck terminal for liquids is even bigger… I can just go on and on.

The plant is a treat to watch in the night. Cameras are not allowed in the refinery otherwise I would have posted pictures. The night drive inside the refinery is something only lucky few can experience and I must tell you it’s just out of the world.

After his visit to Tajmahal Clinton remarked ‘There are two kinds of people in the world. Those who have seen it and love it and those who have not seen it and love it’. My feeling is similar - I loved Jamnagar before I have seen it and I love it even more after I have seen it. For those who will never get an opportunity to see it...well you have missed something in life.

Why Reliance Communications is applying for GSM spectrum

2006-07-13T17:37:00.000+05:30

Anil Ambani’s decision to apply for GSM spectrum has baffled everybody. Qualcomm has lost its sleep and people believe it is just a negotiation stunt by Anil. But there is more to this story than just negotiation tactics. Read on….

Anil Ambani, a stock market addict by heart, wants to offer its customers mobile trading service. However, CDMA technology which operates on packet transfer technology is not suited for online trading. CDMA unlike GSM technology operates on packet system and donot have a dedicated slot for transmission of data from one location to another location. Which means the data transmission is neither continuous nor as secured as GSM making it unfit for mobile trading.

Hence Anil Ambani has applied for GSM spectrum in metro and other developed city where he plans to provide telecom service through both CDMA and GSM service. Through GSM service he will try to target top end customers to whom he would also provide mobile trading service. In rest of the country where he is not hoping to find sufficient mobile trading customer he would continue with CDMA service only.
(Credit of this info goes to my friend Vivek Bajaj)

Acid test for Anil & Infocomm

2006-02-24T14:36:00.000+05:30

Three years back I suggested that Access Deficit Charges (ADC) should be charged on revenue sharing basis rather than per minute basis. Finally with effect from March 1, 2006 ADC would be charged on revenue share basis and not on per minute basis. So is the revolution set to happen as I suggested?

For my prediction of Rs. 500 per month for unlimited calls still we have long way to go. We need to shift to “bill and keep” which will still take sometime. But yes movement towards it can surely start any moment now!!

With Reliance Communications Ventures listing due early next month we can expect some real action in the next fifteen days. I believe Reliance Infocomm or Reliance India Mobile (RIM) should soon come out with a scheme offering unlimited call to all Reliance phone any where in a country for a monthly rental of around Rs. 700. In fact till sometime back Reliance was offering this scheme on its WLL phone which they had to withdraw, as ADC was made applicable on WLL phones too.

Offering this scheme on mobile would have a chain reaction destabilizing the current dynamic equilibrium in the telecom sector and ultimately equilibrium would be restored only once fixed monthly rental for unlimited domestic call to any phone happens. Once RIM offers this scheme, Tata Indicom will follow soon and then all operators will be force to follow as happened after the launch of “Lifetime” schemes. Once all operators start offering this scheme “bill and keep” would logical next step. However this would face stiff opposition from GSM players who would be at a disadvantage considering the technological limitation of GSM. They might try to form a cartel and it would be test of Anil Ambani’s competence how fast he is able to break that cartel. Of course launch of IPTV, broadband, video on demand and other such services would add color to this battle. At the end there might be new leaders in the sector. Currently CDMA technology seem to have a upper hand in this upcoming battle and considering Tata Indicom past history this is the big chance for RIM.

But we should not downplay powerful GSM players like Bharti & Hutch. If they are able to accelerate the transition to WCDMA they might just beat the RIM threat forever. GSM players can also take heart in the fact that now Anil and not Mukesh controls Infocomm. Anil is new at the helm and has his attention spread on too many things. Will he be able to come up victorious in this upcoming telecom battle? This is his chance to become the biggest player in the Indian Telecom market.

We will soon get answer to two questions we have been debating for long:
Which is better CDMA or GSM as a technology?
Is Anil Ambani competent enough to handle Infocomm?

Non – compete agreement (NCA) – I (Telecom)

2006-02-11T14:57:00.000+05:30

As discussed in my blog earlier NCA is the most interesting document in the Ambani Vs Ambani saga today. This ten year agreement is not only of great consequences but it’s also a window to vision of two brothers.

It is quite clear now that the war between the brothers is far from over and the look of things suggests that it may go on for years. And every time this war of words break out the most important document will be this NCA. I wish I could lay my hand on the original draft of the NCA, but meanwhile I would rely on news reports for my analysis. So, this is my first of the many blogs on NCA I would be writing. This focuses on telecom.

According to the NCA – Telecom is the sole domain of Mr. Anil Ambani including entertainment like multiplex, amusement parks etc. except content. But elsewhere in the document it is written that Anil Dhirubhai Ambani Group (ADAG) will have to give first right or refusal to Mukesh in case the group sells a part or whole of any of the businesses. Secondly it also mentions that once a part or whole of it is sold the NCA would terminate and Mukesh can then enter and compete in that business. Now that closes the option for Anil to sell out at high valuation as suggested by my blog earlier. But then it also creates a situation for an interesting possibility.

Reliance’s lesser know telecom venture – Reliance Telecom provides GSM based telecom service under the brand name Smart. It doesn’t make economic sense for Anil to operate on both technology platforms. So what option does he has? He cannot sell out as then Mukesh will be free to compete in telecom & entertainment. And as per DoT guidelines anybody should not hold more than 10 stake in two operators operating in the same circle…. Recently Tata’s have been issued a notice for operating both Idea & Tata Indicom and they have given assurance that they will sell out of Idea. Suppose a similar notice is issued to Anil bhai what will he do? The only option he would be left with is close down the business which is generally not aa viable option considering regulatory environment & financial implications. If he still try to go ahead and sell it not only Mukesh will get the right to re- enter the telecom & entertainment business but Anil would also have to give Mukesh first right to buy Reliance Telecom. And please note I am mentioning Entertainment business along with telecom. Mukesh might not be too keen on starting all over again in telecom but entertainment is something he surely will be interested in. Watch out for my other blogs on NCA to get the whole picture of the fight ahead.a

Lifetime validity scheme – future imperfect

2006-02-10T14:52:00.001+05:30

It stated off as a desperate effort by TATA Indicom to make its presence felt in the Indian telecom market. They were relatively confident that none of the established operators would retaliate, as network utilization was relatively very high for these players. They might have expected Reliance to follow soon but they never expected Bharti to be the first one to retaliate with lifetime validity scheme. So does it make sense for the telecom players or it’s a perfect example of prisoner’s dilemma?

DoT is now checking the viability of this scheme. To be frank in the current scenario this scheme is not only viable but also a good growth driver. All telecom operators are supposed to pay interconnectivity charges in form of termination charges to the operator on whose network the call is terminating. Hence an operator is being paid per minute utilization of its network. GSM players like Bharti do not mind the scheme as revenue per minute of network utilization is higher than cost per unit. Bharti has rightly said, “I have always said that ARPUs in our business are not that important now … If the revenues rise and our capital productivity and operating efficiencies are intact, I would not worry about the ARPUs”. This is because in GSM technology there is major limitation of network availability that is not the case with CDMA where APRU is still very relevant due to high capital investment phase & customer acquisition cost.

A CDMA operator like Reliance or Tata Indicom would prefer high ARPU per customer and would not care much about per minute efficiency because for them network capacity is not the limiting factor. Effectively what has happened with the introduction of this scheme is Tata Indicom has played in the hands of the GSM players. They have not only spoiled the market but they have spoiled the market more so for the CDMA players.

A CDMA operator would prefer a scheme of fixed monthly rental for unlimited usage. In such scheme ARPUs are higher at the same time network utilization is also higher. With the expected change in ADC guideline and shifting to revenue share method this was expected soon. To make it possible the next requirement is “Bill & Keep”. Bill and keep is a system where all the operators agree among themselves that they will bill their own customers and keep the same. There would not be any interconnectivity charges and interconnectivity would be free. The basic premise of the scheme is that on an average outgoing call more or less equal incoming calls. Bill and keep system avoids painful settlement between the operators saving cost and time.

However with the introduction of lifetime validity scheme operators like Tata Indicom might have more low-end customers who make limited outgoing calls but receive substantially higher incoming calls. No other operator would like to agree with such an operator for “bill and keep” as this would be like paying reward for spoiling the market. This could jeopardize the introduction of “unlimited” schemes. The major gainer from this would be the GSM players and loser would be CDMA players.

Another problem with this scheme is the “Legacy problem”. The operators are entering into commitment for not 2-3 years but for lifetime. Tomorrow regulatory, technological & competitive environment might change substantially making servicing this lifetime commitment a problem. Telecom industry has seen legacy problem in recent past (high license fee, limited competition etc.) they should have been more cautious before making such commitment. In the changed environment they will have to opt for costly exit options that might not be available.

Other problem with lifetime scheme is:
1. Numbers would be blocked and wasted even when the client is not using the number (to avoid that Hutch scheme requires recharge every 6 months)
2. It would be difficult to know the real subscriber numbers for a company or for the country, as operators would not be able to remove inoperative clients from the subscriber database.
3. Definition of lifetime – what happen when the license expires or in case of takeover of one operator by another.

Mukesh Ambani reads I Mag

2006-01-29T20:31:00.000+05:30

Most of you who have read my blog know my two obsessions - Reliance & I magazine. I Mag is something I consider to be my biggest achievement till date and am very proud of it. The obsession to start off the magazine was the result of my admiration for the Reliance group and intention to prove my capabilities to Reliance group - my message to them that 'You need to have me in your team'

Now consider this - Mr. Mukesh Ambani visited our IIM Indore campus for the inauguration function. When my juniors showed him all the previous issues of the magazine, he remarked that HE HAS ALREADY READ THE FIRST ISSUE!!! He has not only read the magazine he also remembered that - well that’s an achievement to be proud off!!

I envy Aamir Khan

2006-01-29T15:29:00.000+05:30

I envy Aamir Khan not for his stardom & his female following nor because he like bollywood’s serial kisser manages to kiss all his co-stars and of course not for his personal life.

I envy him because he lives at his own terms, does work which he like, enjoys his work and when he delivers not only people enjoy his work but also go home with some food for thought.

I am forced to blog about Aamir after watching his latest movie – “Rang de basanti”. The movie is mix of Dil Chata Hai and Lagaan. & much better than both of them. The way he (I should give credit to the director) manages to blend the history with present is amazing. The punchline for the movie – a generation awakens is just Perfect. The simplicity with which he has been able to bring out that its not extraordinary people who do extraordinary things but ordinary people who rise to the occasion is proof of his talent. The movie make you realize that you need not be born before 1947 to be part of the freedom struggle. And while he was stubbly making his point he never forgot the point that his job is to entertain. It’s a landmark film for the Indian Film Industry and a standard for others to meet.
At times you get a good view inside the mind of these creative minds through their creative piece. I am not sure how much Aamir was involved in developing the plot for Toyota Innova advertisement but it seems that it was his idea. His last line “I just need to keep moving ahead” sums it all.

Mukesh bhai is back….

2006-01-29T15:02:00.000+05:30

Recent announcement by RIL about its IPO plans, its retail foray and SEZ plans reminds us of the good old days…days before the brothers started fighting…

I love Reliance for its green field projects – mammoth, revolutionary and visionary and going by the indications given by Mukesh Ambani we will see many of them soon….

In one of my previous blogs I mentioned that more than anything else it’s the drive and fire within Mukesh to take up new projects will define Reliance future and now we know where it is heading….you cant keep Reliance down for long…
Let’s try to comprehend size of his dream:
Jamnagar Refinery expansion – Rs. 30000 crores
SEZs – Rs. 100000 crores
Retail – Rs. 22000 crores
Oil and gas exploration – Rs. 15000 crores
Biotechnology, agriculture etc. etc.

Meanwhile Anil is still in news for his closeness with that joker Amar Singh, phone tapping issue, buying stakes in any company he can lay his hand on. But still we have not heared anything about his plans for Infocomm. Anil bhai please do something – tell us about Infocomm strategic moves and not only about impending IPO.

Should Anil sell out of Infocomm??

2005-11-20T18:04:00.001+05:30

Vodafone recently bought 10% stake in Bharti for around 7300 crores…which mean a valuation of Rs. 73000 crores that too without any controlling right. With controlling rights the price would have been even higher. Reliance Infocomm (RI) considering its intrinsic strengths will be valued higher than Bharti. International telecom players are looking to enter the Indian telecom market. Even Virgin group is willing to enter but there is no spectrum on offer and only route to entry is acquisition of existing player. Anil Ambani’s personal stake of around 66% in RI can easily fetch him Rs. 60000 crores!!!

Anil Ambani is a ‘finance wizard’ and his recent acquisition spree suggests that he dreams of becoming “the Indian Warren Buffet” and want to make Reliance Capital (RCL) the next – Bekshire Hathaway (BH). To be frank it suits him. Telecom is a full time business and requires skill set that his brother has not he. Anil Ambani needs time for his early morning jogging, late evening parties, politics and holiday with celebrities. And then his hand is already full with the full time job as MD & CEO of Reliance Energy.

It will make lot of sense for him to sell out Reliance Infocomm. With Rs. 60000 crores cash in his pocket and his funding skills he can make RCL much more powerful in Dalal Street than what BH is on Wall Street.

Given a choice I think Anil would have done it. The way he has managed RI after the settlement is nothing to write home about and even the im*****t Tata is performing better. He knows his limitations. But the problem is – if he sells out now it would be like admitting that he is less capable than his brother. Everybody including me will pass the judgment that he was incompetent to manage RI and that is something he donot wish to happen.

So what is the alternative in front of him –
Partner with some international telecom giant and act as a sleeping partner
Sell out and answer the critics with RCL performance
Hire a competent team to manage RI and himself concentrate on REL and RCL.

Lets wait and watch to see what he does. Mukesh, public & myself will hate him if he sells out of RI but today that is the most logical thing to do and that is what he will do. I wish he proves me wrong and help RI live up to its potential but I doubt he has the capability to do so.

I told you so - Reliance to build SEZs

2005-11-20T17:32:00.000+05:30

, I hate to do it.....but then you have to explicitly tell people to make them realize that you actually did it. Only 3 people till date called me up to say ..." hey Neeraj ...how did you knew that Mukesh will get into the business of building SEZ.....or he actually liked your idea and went ahead with it!!!"

Well it would be wishful thinking to believe that I was the one who gave him the idea of MEGA CITY (http://neerajgutgutia.blogspot.com/2004/05/next-pill-of-viagra.html). To be frank, his recent decision of going to B Schools for recruitment and the $5 billion business plan contest at IIM A urge me to claim that the idea was originated by me. Why else a man who had little faith in B School grads of India suddenly reverse his recruitment policy and also seek business idea from novices? Has one such novice from one such B School socked him with his business plan? The idea had been there on my blog for more than a year. It was published in I Mag 8 months ago and the same idea was selected for an IIM L contest (- "what next for Reliance?") last year – it might be that someone from his close circle came across it somewhere…

But still I would just say that it was the next logical step for Reliance group.. and Mukesh & his team must have thought of it themselves. Even if I cant prove that I gave Mukesh the idea, atleast I have proved my claim that I have the capability to "dream at the same wavelength" as Mukesh!!!

Few things I am excited about

2005-09-18T15:25:00.000+05:30

Well now that I have blasted BT for coming out with top ten so frequently – here is my top ten

1. Google – Virtual monopoly over information in the Information Age - what more you can ask for (Read Mala’s article in BW on Google)

2. Blogging – It’s the future of Journalism, Individual empowerment, Advertising, Media, Creativity, Community, Publishing and God knows what. It’s the next big thing after Email coming from the world of Internet. The best thing about blogging is 95% perfection is enough and you donot have to waste 10 times the effort on the last 5%. It cost almost nothing and it spreads faster than fire. Luckily there is not much policing of content and no entry barrier for talented writers. Maybe a better search engine is required to search out diamonds from this coal mine – google listening??

3. VOIP – As I have discussed already in my previous blog IP technology is a very efficient technology that can make current understanding of telecom economics senseless.

4. Reliance Infocomm – I am again and again restating about the potential of this company. As Mr. Sunil Mittal said – Telecom is like Pacman who keep on growing eating other businesses. Just watch out how many businesses this Reliance Pacman gobbles – Telephony, Broadband, Cable TV, Gaming, Banking………

5. Air Travel for the common man – It’s the revolution we are experiencing and it will continue for while. We have not moved to smaller cities yet. Wait for airport modernization & more aggressive players.

6. Talk Unlimited – Again I am repeating myself but mark my word it’s the next big thing in Telecom in India. And unlike US in India we have Caller Party Pays (CPP) regime that will further fuel the fire created by talk unlimited.

7. Retail – Retail sector is waiting for the policy to signal the take off. It will happen sooner than later. Wal-Mart and others would be worth watching. Equally interesting will be watching Mukesh Ambani’s petroleum retail rollout and the bouquet of products its retail chain would be offering.

8. Multiplexes – The fever has not spread to smaller cities yet. Rational entertainment tax policy of the state government can lead the change. (In Maharashtra State government exempted multiplexes from entertainment taxes for first few years and that fuel the growth). A good business if you want to retire to a smaller city.

9. Knowledge city http://neerajgutgutia.blogspot.com/2004/05/next-pill-of-viagra.html

10. Medical Tourism– In strategy classes we were taught that a company should either position itself as low cost supplier or differentiated product supplier. A person who tries to do both gets caught in the middle & falls between the two tools. Strategy classes warn against trying both positioning. Well…Medical Tourism is another field of outsourcing where India can position itself not only as Low cost supplier but also as differentiated product supplier.

Business World Vs Business Today

2005-09-18T14:38:00.000+05:30

Business Today (BT) is anyday better in terms of looks, paper quality etc. But when it comes to content I believe Business World (BW) beats Business Today hands down. (My short stint at BW is not coloring my views – infact they never published my article and that may have prompted me to talk negative about them).

What BT does is that it provides news, while BW provides views and really good views. Regular column writers of BW are just unmatchable – Niranjan when it comes to economics (Swamminomics in TOI is an equal competitor), Ashok Desai when it comes to government policy, Mahesh Bagchi for management & leadership in corporate world, Mala for Technology and my favorite Mahesh Murthy for Entrepreneurship & Vision. BT doesn’t have even a single column writer who can match any one of them. What they end up doing is - hire some market research organization –data collection – number crunching – and lo the product is ready…Top ten banks, top ten companies, Top ten recruiters, Top ten B School, Top ten software company. …Come-on BT this is not journalism –its like selling soaps. And because this sells the disease is spreading to BW and others too.
Decide what you want to be – Ekta Kapoor & her soap operas or CNBC/ Discovery of the world.

VOIP – Voice over Internet Protocol

2005-09-18T14:12:00.000+05:30

This appears to be the next big thing to hit the telecom circuit and it may take many things (not exactly telecom now) by storm. As Sunil Mittal says Telecom is like the Pacman who keep growing eating other business. Well IP (Internet Protocol) is the thing that will help telecom eat few big-ticket businesses. One of this will be Cable TV business that may soon shift totally to telecom operators. Already IPTVs are in advanced stages of development & testing.
VOIP can kill the difference between local call & STD/ISD calls. It would again lead to ‘Talk Unlimited’ scenario. Currently Indian regulations donot facilitate VOIP but soon regulations will have to change. Indian telecom players are already betting on it. Tata’s latest acquisition – Teleglobe is interesting because Teleglobe has recently merged with itself ITXC – the world’s biggest carrier of VOIP minutes. Reliance is working closely with Microsoft on IPTV technology. Bandwidth (international undersea optic fiber cables) is already there. If policy changes in time India might lead the VOIP onslaught. I am on a look -out for an IP expert who can teach me fine points about the technology. Anybody??

Stock market - The burst is inevitable

2005-09-18T13:55:00.000+05:30

The Indian stock market is having a dream run and it had made people believe that all is fine with the India economy. But I have a different view. I believe that this stock market rally is not sustainable and fundamentals donot support such a rally.

Lets check the fundamentals.
Oil & Gas - Crude oil prices have doubled over a period of one year and no respite is expected in near future. Indian PSU oil companies are taking a hit. Navratnas are going red and this is not sustainable. I agree with Swaminomics that’s spiraling crude price is not as bad as what it was a decade due to increased importance of services and relatively less impact on inflation. But still the inflation is under control because government has not passed the price rise to consumer. But sooner or later they will have to do that and then...inflation will rise.
Foreign currency position is in bad shape if you ignore the hot & unreliable FII money coming to Stock exchanges. Trade balance position is of concern due to heavy dependence on crude imports.

Power – Power reform is dead. Delhi privatization was always a problem, as it did not lead to competition but guarantee of 16% return to a private company rather than PSU. Most of the proposed power plants plan to use gas as feedstock. Now with oil prices spiraling gas prices has to follow them and this will make gas/naphtha-based power plants unviable. (Mr. Anil Ambani I told you earlier through my blog that focus should be on power distribution and transmission rather than generation). Dhabol settlement is another recipe for disaster (read BW cover story for details)

Telecom – FDI and ADC issue is still unresolved. As I told earlier, next big jump in telecom when ADC policy is changed to percentage of revenue rather than per minute basis. Nothing has changed yet. Added to that spectrum issue is unresolved which is holding back capital investments

Roads & port– Its happening but not at the speed it was happening during BJP’s rule. Congress has focus on port, but something concrete is yet to happen.

Airlines – Yes this is a revolution in making. But this too can get badly affected by oil price rise. Fate of the Mumbai & Delhi Airport modernization would be a good indicator or this sector. Lets wait and watch.

Steel, cement, coal & other commodities - Prices are at all time high making new capital investment very costly

The point I am trying to make is that there is nothing that justifies the kind of rally that we are experiencing now except the ‘hot & unreliable’ money coming from abroad. The problem is this money will go off as soon it came. The burst will create its own negative spiral that will pull down economy when it doesn’t really deserve

Stock market Burst ------- fall in confidence -----fall in capital investments ---fall in prices----fall in income---fall in demand----fall in capital investments

Reliance Infocomm - Buy

2005-09-04T17:08:00.000+05:30

Reliance Communication Ventures - The Reliance group holding company for Reliance Infocomm, Reliance Telecom, FLAG, Reliance Communication Infrastructure Ltd and all other Telecom related ventures will be automatically listed on the stock exchanges soon.

Ambani brothers have valued it at Rs. 32 per share for their family settlement but it s worth much more. My target price for the same is Rs. 250 in 24 months from now. I believe it will list somewhere around Rs. 100 when it get listed. Oppurtunity to make 2.5 times in 2 years ...not bad isnt it.??!!

My suggesting buy as many shares of RCV as you can afford at any price below Rs. 100 and sleep over it for 2 years. I am open to the idea of sharing or risk and return if anybody is interested - interested??

Real life - case study

2005-09-04T16:38:00.000+05:30

What happens when a premium car maker (lets call it Mercedes) diversifies into making cycles? Well, it had no option – there were not enough people who can afford a Merc then and people needed cycles. It went ahead and created a revolution. It is the biggest cycle maker in the country today and seen with awe by everybody around.

The company went ahead and used the assemble line on which it was making Merc for its cycles. The staffs that were some time back manufacturing Merc were now making cycles. Technology was unmatchable and other cycle companies just stood and watched. It was great thing for the cycle business. When in the past has such high tech machine and technicians used for making cycles?

But what about the Merc? Its being manufactured on the same assembly line. The people who are testing cycles are also testing Merc!! Same safety test for a cycle and Merc!!! The same people & machine that is making cycles are making Merc one after another, on the same assembly line!!

Meanwhile the country has developed significantly over the last decade and there are enough potential customers for Merc now. But will this company now be able to compete with the new premium carmakers that specialize in making cars and have a dedicated assembly line for cars. Is it a good idea making Merc and cycles on the same assembly line? Can it do justice to its Premium car….or it should just concentrate where it is successful - the cycles?

Well this is a real life case study …industry is different …company is different…the facts are the same…what do you suggest? Focus on cycles? New dedicated assemble line for Merc? Or maintain status quo?

My failures and how I feel about them now

2005-09-04T15:40:00.000+05:30

Was just recollecting moments when I have reached very close to my target and then didn’t quite made it. Things I have worked hard for…meant a lot to me that time… and now what I feel about them

Getting into SRCC

Would have looked good on my CV….but KMC is something that made me…the initial adverse situations…hostel…ragging…politics…I don’t think I should have missed that learning….and man I relish every moment I spent there….and I have enough big names on my CV now …

Getting into IIM A

Well IIM I was the best thing that happened to me…I think I was very lucky to get into IIM I. And man I tasted my first 100% success there…I mag…I managed to do it as I have dreamt it….will exchange nothing for that one moment…Thanks God for I and not A. And few might agree the kind of people I made friends with at I, I am sure were not there even at A. Just watch out for our batch…It will make IIM I proud.

Getting into Jamnagar refinery

Well this is the funniest of all. I was told that my mother had wished that if my father clears his CA exam they would visit Tirupati mandir. So I also promised myself before my CA exam – If I get through I will go to Jamnagar refinery of Reliance (“modern temple of India”)
I stuck to my promise when I got through….within a week of clearing the CA exams I was off to Jamnagar…around 3000 kms from my place. Only to be turned away from the gates…still dream of getting inside…it still inspires me….its about to become even grander will planned doubling of capacity…will visit the temple soon…very soon…

Publishing my article in Business World

Man I had never been so close to my dream like that moment…I was almost there…I believed that one article of mine can open all doors for me in future…I would be able to prove my potential…I has a feeling that I have arrived….and then it came crashing down…the call from Reliance to my boss at BW…the project shelved…I admit I wept that day…I had worked very hard for that and had put my career at risk for that…I almost made it …but not quite…

But it gave me the fire – the drive to dream of I mag. And as they say failure is the stepping-stone to success…The I mag, which I am very proud of today, is the result of my BW failure …God give me such failures again and again!! During my SP Jain interview I defined success as “opportunity to dream bigger than the previous day”. At BW I was fighting to get one article published…and that failure made me conceptualize a mag…was that a failure??

Job at Reliance

This has been real hard nut to crack. After CA results, I made atleast 50 applications for job at Reliance. Visited atleast 12 Reliance offices in different cities and didn’t even managed to get an interview call from them. Went to the extent off getting into Reliance’s ‘walk-in interview’ meant for engineers, disguising myself as engineer…still didn’t managed a interview call. I think time has come to apply again…….Reliance here I come.

Moral of the story – “Aim for the Sun – You will reach the stars atleast” (in geography classes I have been told Stars are further away from Sun…unlike what was believed by people who wrote this phrase)

I Mag is available online now

2005-07-04T21:47:00.000+05:30

Now you can access I mag online too. The address of website is www.iimi-imag.com Links to my articles are:
http://www.iimi-imag.com/showArticle.asp?url=articles\JAN05\Jan0509.htm
http://www.iimi-imag.com/showArticle.asp?url=articles\JAN05\Jan0510.htm

I told you so!!

2005-07-04T21:40:00.000+05:30

Well, even Economic Times and Times of India blow their own trumpet these days, then why not me. And then it’s well deserved.

Case 1
Remember my story on Reliance Infocomm funding fraud(http://neerajgutgutia.blogspot.com/2004/06/rs-17262-crore-fraud-reliance.html)Remember I predicted that funds have been transferred from RIL to RIC @ 8-10% well it was done on 7%. I was able to know the fraud in 2001 ...four years ahead of Managing Director (Anil Ambani) coming to know of it. Isn’t it an achievement?

Case 2

Remember my cover story “talk Unlimited @ Rs. 500 p.m.”. (http://neerajgutgutia.blogspot.com/2004/06/telecom-sector-artificial-barriers-to.html) I talked about the idea of “India One” much before our telecom minister thought of it. Now flat rate and ‘India One’ is just a matter of time. Again two years ahead of anybody else.

Need I say more?

Can Anil walk the talk?

2005-07-03T17:07:00.000+05:30

Yes Anil, you won the battle. You have proved that you are a better negotiator than your brother. But you have lot more to prove. You might create lot of hype by announcing one big project after another. But the real challenge is to implement these project and sorry to say I doubt you capabilities on that.

You rightly claim that the group’s growth machines are with you and we hope you are right when you said that you vehicle has no reverse gear. Your real challenge is Reliance Infocomm. It’s an amazing asset. It has the potential to change India forever. Your challenge is to make sure that Infocomm lives up to his potential.

You maybe more media savvy and a better negotiator but now its time to prove you project implementation skills. I understand you ambition regarding Reliance Capital and it fits your skill set. But your mega investment plans for power sector baffles me. And what disappoints me is even when you are talking so much you have not even made clear your vision for Infocomm. I just wish you donot mess up India’s once in a lifetime opportunity to bridge the economic divide with the developing world. I feel you don’t even realize the potential of Reliance Infocomm massive optic fiber backbone and last mile infrastructure. Your brother had gifted you a magic wand that I am not sure you know how to handle it. I hope your chapter in history donot end with the line “Bandar ke haath me narial”

You at one time want to run in three different directions – banking & finance, power and Infocomm. Infocomm is big enough project to keep you busy (you wont get time for your parties, holidays, exercise and Politics); I can’t understand how you hope to drive three different engines in three different directions at full speed. Get realistic man!!! And do more talk less!!

"Ultimate sacrifice to buy family peace"

2005-07-03T16:37:00.000+05:30

I feel pity for Mukesh Ambani and today I would not like to be in his shoes. Surprised? Yes he still has India’s biggest private sector company…a fortune 500 company...but what price he has paid for it!!

He had to give up his baby (Reliance Infocomm) for a Rs.80000 crore empire. I feel it was not worth it. If I had been in Mukesh Ambani I would have opted for my baby rather than RIL. Maybe Jamnagar and other projects were as dear to him as Infocomm, but then Infocomm was special…from Idea to Implementation it was his project. He never worked under his father’s shadow on this project…from day 1 it was his pet project …his baby. He will weep when Anil wont be able to manage the project and he will feel sorry for himself if Infocomm does well...because his brother will take all the laurels.

Anil Ambani got a great deal. He started off from a position where he had nothing to loose. Mukesh had everything to loose. Anil by fighting a shameless battle in front of the media brought Mukesh on the back foot. For Mukesh reputation was at stake...for Anil if Reliance was not his nor was its reputation. And with every assault on Reliance in public he managed to push Mukesh more and more to the wall. In the end Mukesh wanted to just get over with the whole episode and start afresh with whatever is left. And then Anil got the deal of his lifetime. Anil proved it …he is a better negotiator than his brother.

WHAT NEXT FOR MUKESH AMBANI? That’s the biggest question now. He is jobless without Infocomm. Yes there are few things he can do in RIL like expanding the capacity of Jamnagar refinery, building petroleum retail chain, gas pipelines, oil and gas exploration. But most of these businesses have stabilized to an extent and that donot require the unmatched ‘project implementation skills’ of Mukesh Ambani. Biotech also is not a Reliance or Mukesh kind of business. Rs1000 crore is the maximum he can think of investing in Biotech and its not a economy of scale game. So what’s “the next pill of viagra” (http://neerajgutgutia.blogspot.com/2004/05/next-pill-of-viagra.html)…. even my idea of Mega knowledge city doesnot make sense for him as Infocomm and power business is with Anil. What will he do next. Power, Telecom, Airport, Media, Banking & Finance is all with Anil and they have a not -compete agreement for ten years.

I am waiting for the next AGM of RIL where he should declare the new blueprint for future for RIL. That day we will know the future of Mukesh. Will he continue with the same passion and infectious impatience (the biggest two qualities which makes him Mukesh Ambani) or will he after the loss of his baby loose heart and take it coolly in future. My bet is still on him…he has to prove that he has the Midas touch…has capability of conceive unthinkable project and implement it…let us know Mr. Mukesh what's on your mind. Prove it that you are the real inheritor of your father.

Why is Anil so bullish on power generation?

2005-06-08T22:54:00.000+05:30

To be frank, since the time Anil Ambani had started washing dirty liners in public I had lost respect for him and had been criticizing him regularly on my blog.Sometimes I feel I may be wrong. He may have been an equal partner in building the Reliance Empire and like Infocomm which was Mukesh’s baby, Reliance Energy might revolutionize the power sector. But somehow I have not been able to decode his plans. The more I try to understand his game plan more baffled I get. Is he having some trump card up his sleeve or its just faith in their own project implementation skill is what making him focus all out on power generation?

My knowledge says that distribution should be what they should be focusing on. Has any technology revolution taken place in power sector which can help india skip few stages of development. Something similar to what optic fiber technology did for telecom? During my interview with CRISIL, my interviewer who is an expert in the sector said that such technology exists. I had not been able to place my hand on what exactly is this new technology breakthrough which might be Anil's trump card.

Can Reliance do in power sector what they did in telecom sector with CDMA trump card?

Today I was reading about Anil's commitment to invest Rs. 48000 crores in Hirma (Orrisa) for power generation, apart from their investment in Dadri. They are looking to add 20000 mw of generation capacity. However their plans for power distribution is still not clear. Real inefficiency in india is in distribution sector and there lies maximum oppurtunity to make a difference. Its not that generation is not important but distribution is very critical. Otherwise it would be like creating Jamnagar refinery without any petrol pumps to sell the output. And then end up in the hands of IOC, to sell the produce to them at price dictated by them.

Critical question as this stage is whether Reliance had planned integrated distribution for power & telecom (http://neerajgutgutia.blogspot.com/2004/05/reliance-integrating-telecom-and-power.html)if they had as I earlier suggested...we should just wait and watch out for another Reliance revolution in power sector. But the recent development suggest that both brothers were dreaming independent dreams, one in telecom and the other in power. And at this later stage I am not sure whether those empty ducts infocomm infrastructure can be modified for power distribution. And if it cant be modified, Ambanis have lost billions of dollars due to their infighting :(

Anil, you are passionate about your power project and I am passionate about your telecom project. Why dont you focus all your energy on power venture and make me head of the infocomm project. You will end up will all the gains, and I will be able to live my passion.

Or is this Hirma project just gas?

Next Revolution is the “Broadband Revolution” ……

2005-06-06T15:36:00.000+05:30

....and it would not be restricted by per capita computer penetration figure!!

What is Broadband – GOI defines it as internet with a speed in excess of 256kbps. I would define it as “always on internet” something like cable Tv but with two way interaction capability.

Today one friend of mine mailed me back reacting to my open letter to Mr. Anil Ambani saying that Infocomm success will take time due to limited computer penetration, lack of acceptability and comfort with new technology of Indians etc.

Well that’s why I predict that Reliance Infocomm would lead this revolution. The broadband revolution would be similar to the mobile revolution. It would not be powered by computers alone but by Internet protocol Televisions (IPTv). Reliance two years back tied up with Microsoft for manufacture of IPTv. I hope Bill Gates is working as per schedule.

I expect the broadband revolution to be a carbon copy of Mobile revolution. Remember Reliance’s Monsoon Hungama where they offered mobile sets for Rs. 500. Experts touted it as ‘historic blunder’. Well Reliance will repeat the historical blunder to get the same results in broadband market. Everybody noticed the mounting bad debts but nobody noticed how Reliance managed to reach the customer base of 1 crore customer in a span of 12 months when others took a decade to achieve the same. And mind you due to economy of scale they had bought handsets cheap and never made loss on the whole deal.

Same pricing would be used for broadband offensive. Rather than selling computers Reliance would be selling TVs with internet capabilities or IPTv. The price of Tv would be kept around Rs. 3500 or would be bundled with one year free internet usage at Rs. 8000. Considering average price of handsets sold in India is Rs. 5000 it’s not at all steep. And cost of 21 inch base model television is around Rs. 10000. Now look at the television penetration figures and you would get the idea. Infact there is a possibility that there would not be any need of buying a new television, a set top box kind of instrument might be useful to bridge the gap between a TV and a computer.

The major advantage of going through this route would be acceptability and comfort of Indians with the electronic equipment. Show me somebody who donot know how to operate a television and I will show you someone who won’t be benefited by this revolution. If farmers in rural India can utilize the power of internet through e-choupal I don’t see any problem in customer acceptability of new technology. To be frank I also didn’t knew how to operate a mobile handset till few years back. The power of this revolution would be determined by the number of services it manages to shift online.
And considering Indians lazy nature and harsh climate there would be many. Just wait a couple of years to witness a new breed of couch potatoes.

How to reform Judiciary overnight?

2005-06-04T21:52:00.000+05:30

According to one of the documentaries of BBC India a its current speed would take 324 years to clear the cases already pending in Indian courts and that too if there is no other case registered in the meanwhile!!

We need to agree that Indian judicial system is in shambles and something needs to be done at the earliest. Judiciary in one of the pillars on which democracy functions and without it democracy is only in the name. Few days back Supreme Court gave the verdict in Bofors case, dismissing charges against the Hindujas. More than a decade old case relating to 64 crore arms deal costed Indian government 250 crores!!! Not considered all indirect expenses, leave away the cost to defendants etc.

Judiciary system has become a joke and the unwritten rule in India is - you are innocent until find guilty and the best way to defend oneself in Indian judiciary system is delay judgment. In Sunny Doel's words...tarik, tarik, tarik.

Here I suggest a very simple cure to the problem. The solution is not only of far reaching effect but surprisingly it’s also very simple and easy to implement and there is no problem of political impracticability.

According to Indian laws professions are not allowed to charge fees for their services in form of percentage of the result achieved. i.e. a lawyer can only take a contract amount as fees but not a cut in the final relief or compensation grated by the court. In developed countries it’s a normal practice for the lawyer to contract for a certain percentage of compensation as fees. In such case generally all the expenses are borne by the lawyer and his remuneration is directly dependent on the outcome of the case. In such conditions it’s in the interest of the lawyers to not only get the best result for the client but also at the earliest possible.

However, in our socialist country this has been banned and professionals are allowed to contract for only a fixed amount as fees and not a share in the outcome of the case. The logic behind such a regulation is - it would help professionals maintain high standards in practice (sic). Otherwise profession would become like any other business and there would be no ethics left in practice.

The time has come that India change this rule and allow professional to contract for share in the outcome of the service. This would not only help poor people who can ill afford the legal service to hire good lawyers (against higher share of outcome going to the lawyers) but it would also lead to quick settlement of the cases. Once sharing of the outcome is allowed it would be in the interest of the lawyers to get the judgment as early as possible. The cost of delay in judgment would pass from the parties to the case to lawyers of the case.

One argument maybe that lawyers even when given an option may not opt for percentage share mechanism and may force clients to pay fixed sum. Market forces will take care of this. Clients would opt for lawyers who are ready to bet their remuneration on their performance. Hence more and more lawyers would have to shift to this mechanism.

Another advantage would be the ‘fear factor’, which is really what judiciary system really aims to instill in a society. Currently due to dismal state of affairs of the Indian judiciary system very few fear the system and know that if caught they would either manage to get a positive decision or at least indefinitely delay the judgment. The fear factor in the society is missing and this is leading to increasing crime and corruption rate. But once this law is there, people will know that there are lawyers willing to take up case against them, bear all expenses in return of a cut in the final outcome. An aggrieved would we willing to approach the judicial system because they know they have nothing to loose. Until unless favorable judgment is received they would not be required to meet any expense, as that would be meet by the law firm. And considering the unemployment among lawyers in the country there would be many takers for cases of such poor people who can’t afford the expenses of approaching the judiciary.

And I don’t foresee any political or other practical problem in changing the above-mentioned law. Maybe lawyer organizations may oppose it in the beginning, but then there would be a section of lawyers who would be pro such change. All the government need to do is to present it properly in front of the media to create positive media support in favor of the change.

Our finance minister is also a lawyer. I think he would buy the idea. Sir, what do you think of the idea?

Open letter to Mr. Anil Ambani

2005-05-27T18:57:00.000+05:30

Dear Sir,

According to news in certain section of the media, Mr. Mukesh Ambani has agreed to take RIL and give you Reliance Infocomm and Reliance Energy. If that's true I suggest you accept the offer before he changes his mind.

I offer myself for the post of Managing Director of Reliance Infocomm and promise to make it more valuable than Reliance Industries Ltd. in flat two years.

Donot doubt me. Just to prove my point - Bharti with its customer base of around 1 crore customers is valued at about Rs. 35000 crores. And the best future projections for the company would at the best suggest few crore customers more...lets say 5 crores by 2010. Reliance Infocomm has about the same number of customers today i.e. 1 crore and is expected to grow their mobile telephony market at the same pace as that of Bharti. But the difference is that BY 2010 VOICE WILL CONTRIBUTE ONLY 10% OF INFOCOMM's TOTAL REVENUE. Which means, Reliance Infocomm's mobile business would be as big as Bharti and it should be valued as much for its mobile business. But what need to be considered is the rest 90% of Reliance Infocomm business. Another 10% would be contributed by broadband, video on demand, cable TV, video conferencing etc. Another 10% would come from broadcasting and media related activities.

Revenue sources that most people are right now not able to imagine is revenue like from Revenue from Banking system for leasing of bandwidth for Real Time Gross Settlement (RTGS), ATM connectivity, revenue from bandwidth leasing for e-governance, for national network of camera at public places etc. And mind you unlike the voice business in most of these businesses Reliance would have a virtual monopoly.

Infocomm's real strength is its National backbone of optic fiber. Nobody had laid that on the scale at which Reliance had laid and hence would not be able to meet the bandwidth requirement of nation for services other than telecom. Reliance had the foresight to put in 12 ducts while others were investing in one or two. Nobody can now replicate this infrastructure as Reliance already has first mover advantage and has enough capacity to make and additional investment in optic fiber capacity unviable.

All Reliance Infocomm need to do is to invest in the last mile. Connect as many villages as possible in the next 12 months. If Reliance Infocomm can live upto its pledge of reaching 5700 towns and 4 lakh villages by the year-end, it would become invincible. Organizations like RBI, State government, police department etc. Everybody would have no choice but to come to Reliance for bandwidth. Imagine the power Infocomm can command.

Based on the above estimate if 10% future revenue gives a valuation of Rs. 35000 crores, Reliance Infocomm can be easily worth 350000 crores by 2010!!! In 2 year time I promise a valuation of 1,75,000 crores. Yes, to get to that point lot of hard work in terms of setting up the last mile infrastructure is required. At the same time VISION is very important. The limit of this marvelous infrastructure Reliance has created is only that of vision.

And here is where I come in. Excuse me if I sound immodest. But believe me, last eight years of 'Reliance Stalking' has helped me develop capability to dream at the same wavelength at which Mukesh Ambani has been dreaming for this project. Give me opportunity to interact with you, one-to-one for 30 minutes, I promise I will convince you.

If Mukesh is really offering you Reliance Infocomm I suggest you grab it and run. But just make sure that he is also giving up the optic fiber backbone and not just the Mobile business. I just can’t imagine Mukesh would give up this goldmine. I doubt Reliance Communication & Infrastructure Ltd. (RCIL) and not Reliance Infocomm owns that optic fiber infrastructure. He may be giving you Reliance Infocomm but he would retain RCIL. And without this optic fiber backbone Infocomm is worth nothing.

I hope you will give a thought to my offer.

Regards,

Neeraj Gutgutia
neerajgutgutia@yahoo.co.in

Charge Rs. 1500 cr for spectrum allocation

2005-05-25T19:35:00.000+05:30

Yes, for a change, I agree with Mr. Ratan Tata. Yes, for a change, I am not advocating revenue sharing but one time charge. But this case merits so. SPECTRUM IS A SCARCE RESOURCE. It’s not something you can give out free to everybody and you need to utilize it efficiently in the interest of the nation. What if 100 telecom players start demanding 3G spectrum free of cost..can you provide it? If you start providing it for free ...MTNL will get a diff spectrum, BSNL will ask for different, Reliance Infocomm will ask of diff spectrum and Reliance Telecom will ask for different and so on. People will form separate telecom companies just for spectrum allocation and then sell it out to others for a price or underutilize it.

On an average we can expect a national player to have 1 crore mobile connections.(Both Reliance and Airtel has crossed this figure..Tata is already ready to pay the amount although it has relatively smaller customer base). If we take the figure Mr. Tata suggested i.e. Rs. 150o crores it amounts to Rs. 1500 per customer. This amount can be recovered from the telecom players in 12-18 month time from 3G services, which is a good enough pay back period. Smaller players who have lesser number of customers can lease out the extra spectrum to others. In fact spectrum should me made freely traded commodity and once the government sells it for the said amount it should not exercise control on players in terms of selling it down to others.

Yes, I agree that already telecom players are suffering from too many charges and additional charge will be a burden on the customer. What I suggest is - make a fund out of spectrum allocation for Universal Service Obligation (USO) and abolish Access deficit Charges (ADC) & USO charges. Apart from one time fee for spectrum, charge 2% of the revenue as spectrum charges that will help meet this obligation.

Charging for spectrum is important for its efficient use and to avoid hoarding and black marketing. At the same time telecom service should not be taxed to an extent that the business loose its luster. The above suggestion will ensure both.

What if dollar bubble bursts??!!

2005-05-25T18:12:00.000+05:30

Right now I am not getting into if there really is a bubble and will it burst. We will discuss it sometime later. What we are talking right now is what if it does?

Have you hedged your position for such eventuality or you are over exposed?? Are you earning from a job, which is dependent on US and salary differential between India and US? Have you invested in Indian IT companies whose business model works on salary differential arbitrage?

You are still questioning the basic premises that dollar is going to burst...well lets discuss it. US is insisting China to depreciate its currency by 10% which means they admit that it’s over priced against Yuan. Indian rupee purchasing power parity (PPP) with dollar is around 15 (will check the figure), which the exchange rate is around 45. Which means its over valued against rupee too.

But the real problem is the amount of dollar reserve India and China are holding. India is holding around $150 billion and China another $600 billion. Just think what will happen if dollar starts depreciating? There would be a panic in these countries to convert its dollar to more stable currency like EURO, which would only accelerate the rate of depreciation of Dollar. We need to understand the strength of dollar lies in the confidence investors have in dollar...once that goes it would be go bust like a bubble. When will that happen is anybody's guess.

In fact every expert today agrees that dollar has to depreciate and its being artificially being kept up being the "World Standard" currency. But then it’s a double-edged sword. It has its benefit but once the confidence goes it would act against it. The only hope is that this slide would happen gradually so that nobody is hurt. It could happen if India and China decides to gradually convert their dollar reserve into basket of currency compromising of Euro, Chinese Yuan, Rupee and Dollar.

As you must be reading power equation in the world is expected to change and its expected that China and India will take over from U.S. Don’t you think that would also have a effect on the respective currency. My forecast is - the power shift would be gradual only if dollar depreciation is gradual.... THINK WHAT HAPPENS IF DOLLAR SUDDENLY CRASHES!!

If dollar crashes the so-called American multinationals would shift their corporate headquarters to India/ China because here is where the market and factory lies. Do not expect them to be loyal to US. They would behave like rats and would leave the sinking ship first. Yes, my prediction is that survival of these American MNC’s need not mean survival of America the Super power. (They may have to go through lot of mergers acquisitions, change of ownership etc.)

Other argument is - if there is a run on US currency they will use their oil reserve to fight it. Such distress sale never fetch you good money it would only lead to crash of oil prices too. (There would be downward pressure on the oil prices before the distress sale due to fall of US economy and this distress sale would only accelerate it)

Well dollar crash is not something India should be praying for because India is heavily dependent on US for its exports (software etc.) and dollar crash also leads to erosion of value of its foreign reserve. Same is the case with China. One option in front of them would be to pay back the dollar debts with these dollars but that depends on the maturity agreement of such loans. For business they would have to look across the Great Wall of China and trade more among themselves.

Its not, that, I am expecting this to happen soon. I am writing this blog just to suggest to Indian government two things:

1. Keep the foreign reserve in basket of currency rather then over exposing the country to fate of dollar

2. Look to develop trade with China; they are the partners we need in future. We compliment each other well in terms of strengths; we have control over 2/5 th of world market and geographically well located for trade. It’s time that we focus more on China and less on US.

ICICI - the learning organization

2005-05-21T21:57:00.000+05:30

ICICI's focus on learning is commendable. IT has an in-house website with 108 modules related to banking for employees to learn, test themselves and get certification. This website has been designed very well and is very reader friendly. Added to that completing few modules is made compulsory for appraisal purpose.

I am also among the privileged group of management trainees who are provided month long training (with full salary) on joining. 10 days at Chandivali learning center were we got the chance to interact with the top management and now 3 weeks at IFRM (Institute of Financial Management & Research) at Chennai.

An organization, which gives so much importance to learning, is destined to succeed. Opportunity to interact with top management help new joinees develops holistic view of the organization that is otherwise very difficult in a big organization like ICICI. It would make sure that there is no shortage of young and talented people in the organization.
Well i am dying to get into action but at the same time glad that i got the opportunity to learn the way it is being done at ICICI

ICICI - 'Reliance' of Banking

2005-05-21T21:43:00.000+05:30

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Dont be surprised...you will be seeing more space being dedicated to ICICI bank on by blog now that i have joined ICICI bank. And the way ambani brothers are fighting its better I hedge my risk...toomuch exposure to single company Reliance might ruin me...;)

And frankly I believe ICICI bank is as big a success as Reliance. In the last few days heared the story about how none of the Harvard students suggests ICICI to move into retail after reading the case study. Wellto be frank i might have done the same. What they have done is something which couldnt have been dreamt off. They have brought about revolution through ATMs as Reliance would be doing with optic fibre. They have "commoditied" banking products like Reliance has been doing with petrochemicals.

Business strategy of both the company is quite similar....
1. Operate on low margin high volume. Model which none of the multi nationals have been able to appreciate ...maybe bcoz they belong to counties with sparse population
2. Use the latest technology and donot underestimate the customers in terms of acceptability of technology
3. Speed....ICICI bank's '90 day rule' is as commemdable as dhirubhai's infectious impatience

Now ICICI is moving international....bold? foolhearty? Well my money is on ICICI!!!

Why 25000 cr for refinery expansion

2005-05-20T22:47:00.000+05:30

http://www.hindu.com/thehindu/holnus/006200505151054.htm Check this news item in Hindu. Reliance will be investing Rs. 25000 crores to expand the capacity f its 33mt refeinry to 60 mt. Reliance spent almost the same amount (at today prices) for the first 27mt capacity in the 90s. But does this mean than there is no scale advantage and the incremental 27mt will cost the same 25000 cr (at todays prices) like the first 27mt. Reliance ...the company which taught india the meaning of economy of scale wants us to believe that!!
Come on...my calculation says it wont cost more than Rs. 17000 crores (at today prices). Infact the plant was always designed in a fashion that the capacity can be upgraded to 60mt just by "DE-BOTTLENECKING".
Reliance didnt did so earlier because it was having problem selling its produce in absence of retail network and price administration by govt. But now things have changed for better.
I fear this is another ploy of Ambanis to take out money from Reliance and put it in their own pocket....maybe Mukesh will use it to pay off Anil in cash for share in Reliance.

Will Sunil Mittal Sell out of Bharti

2005-02-03T01:08:00.001+05:30

Bharti share price is going great guns. The script is ruling around Rs. 218 per share. In a short span of around 18 months the price of the script had become more than 4 times its intial value. The company is valued as top ten companies by market capitalization in the country (around 41000 crores).

Now government has allowed FDI upto 74% in telecom companies. Sunil Mittal has been lobbying for it for long. So what will he do next - considering Singtel can take upto 49% stake in the company (Singtel already has substantial share in Bharti ). Will Sunil Mittal try to maintain control over Bharti or will try to cash out.

Some indications suggest that he himself is not very sure of future of GSM Vs CDMA in India. Secondly he has shown inclination towards retiring from telecom business. He may take up some peaceful low profile business or he may become a venture capitalist. The possibility of second option is higher.

This is the right time for Mittal to cash out. The market capitalization of the company is high, its main competitor (Reliance) is in trouble right now, FDI has been allowed and above all GSM players who don’t want CDMA to succeed in Indian market are ready to pay a premium for stake in Bharti.

Mind you I don’t have any doubts about the competitiveness of Airtel business. In fact even when the market matures and there is a shake out, I believe Bharti would be one of the survivors. Considering today’s scenario if the ‘rule of 3’ situation arise the First two on anybody’s list would be Reliance and BSNL & MTNl combine. Which means Bharti would be fighting for the third spot with like of Hutch, IDEA, Tata Telecom etc.

One other reason why Bharti may opt to cash out is that he know that he can’t control the company for long. Huge investments are required to stay competitive in this sector and unlike its competitors, Mittal donot have deep pockets. Sooner or later it will have to go for dilution of stake which would lead to conceding of control to likes of Singtel.

The most probable scenario that appears to me is that Bharti would sell out the controlling stake to Singtel of other foreign investor in 12 months time. There would be an agreement that he would continue to be the CEO for the next two years or so. The details of the deal would be disclosed upfront. Slowly and smoothly the handover will take place with Sunil Mittal retaining less than 10% stake. He would retire from telecom and would become a venture capitalist with all the cash he would receive from selling his stake. Our estimation suggest that he can easily get Rs.25000 crores for his stake which is a very good price and Mittal may not be able to get the same valuation in future. It would be really interesting to see what he decides.

So called Experts & Finance Wizard at Reliance

2005-02-02T13:15:00.000+05:30

I always used to wonder why I am able to get so much insight into Reliance and others can’t. I was the first to write a case study on funding malpractices at Reliance Infocomm and how Ambani (Mukesh) is benefiting from infocomm investment at the cost of RIL shareholders. Considering its huge shareholders base and the weightage in the index it should be the most tracked company in the country.

Then I thought maybe experts donot consider Reliance that much relevant now compared to the new economy companies. I thought maybe as other companies are hogging the limelight Reliance is managing to go Scot-free. But that was six month back. Now Reliance is in limelight and maximum newsprint is today being wasted on the “Corporate Governance” issue at Reliance. But these ‘so called experts’ are not even asking the right questions!!

Everybody is repeating the question about the price at which Rs. 1 share were issue to promoters like RIL, Mukesh Ambani, his friends and associates etc. But nobody cared to add up the entire figure given by RIL and questioned and where did you get the rest of the money?? Reliance Infocomm project had an investment in excess of Rs. 20000 crores already and all the figure of equity investment quoted till date (http://www.relianceinfo.com/webapp/Infocomm/jsp/media/PressRelease.jsp?id=114) adds up to only around Rs. 4662 crores. Which means debt equity ratio of the company is higher that 3.29!!! Who will be willing to take that kind of Risk and at what rate of interest??

Again money is being diverted from RIL (at the cost of RIL shareholders) to Reliance Infocomm or Reliance Communication and Infrastructure Ltd. (RCIL) which is the holding company of Reliance Infocomm and subsidiary of RIL. Read my earlier blog (Rs. 17262 crore fraud @ Reliance) for details.

Another question - Check Reliance Infocomm website. In the section of the website where they have mentioned various services offered by the company in services like Broadband etc. they have mentioned that RCIL is the company providing this services. Why RCIL and not Reliance Infocomm, what would be the transfer pricing mechanism. Why RCIL exists in the first place. What must be the intention behind mentioning this on the website below every service that it is being provided by another group company? Do you smell a rat??

Mr. Anil Ambani the financial Wizard of Reliance …why are you not able to lay your hand on this when you are sending out 500 page documents on the issue. Are you really a financial wizard or just a page three personality who has been given the title by the media?

Neeraj Gutgutia
mobile: 9893004531

Buy RIL at anything below Rs. 400

2004-11-28T20:25:00.000+05:30

If Reliance Industries Ltd.(RIL) goes below Rs. 400 you can bet your shirt on it. Reliance will touch Rs. 800 as soon Reliance Infocomm is listed and that will be within 18 month time. Infocomm is the most visinory project ever taken up by any corporate in India and even experts are unable to estimate its potential right now.

Secondly if there is a battle for control among brothers stake in RIL will matter. Hence both of them would be buying shares in RIL through dummies. There is not much down side in RIL.

Sell your holdings in Reliance Energy Ltd. (REL) and stay out of it for next 12 months.

Mukesh Vs Anil

2004-11-28T13:39:00.000+05:30

During the last ten days many people have asked me my opinion on the feud between the Ambani brothers and the future of Reliance. I avoid commenting on the topic and just joke that it will force them to look for a compromise candidate and who else but me would fit the bill.
But jokes apart, it is a big issue. It would not only affect the group by India as a country. At Dalal Street the transition in India’s economy is jokingly described
as the transition from self-reliance to Reliance. And this is not without reason - the group 3.5% of the country's GDP, 10% of the central government revenues, employs 80000 people, has investor base of 35 lakhs and customer base running into crores.
I always maintained that only two things can stop this dream run of reliance:
1. Fight among the brothers
2. Strategy of doing everything on their own even for retail initiatives like infocomm and petrol pumps by employing lakhs of people
(http://neerajgutgutia.blogspot.com/2004/07/reliance-stretching-it-too-far-its.html)

I hate to comment on family issues and prefer to concentrate on the business part. But now I have no choice - this family issue has put a question mark on Reliance future.

To be frank it had to happen someday or the other....but yes it happened too fast. As the family grows they have to divide but this divide can be more amicable. The problem with Reliance now is that its major strength of Vertical Integration will make the division difficult. The power business is deeply linked with the Infocomm business and solution like Mukesh taking over Reliance Infocomm and Anil taking over Reliance Energy is not possible.
(http://neerajgutgutia.blogspot.com/2004/05/reliance-integrating-telecom-and-power.html)

A solution is required where both the brothers hold equal share in the parent company Reliance Industries Ltd. while total management control of Reliance Infocomm rest with Mukesh and Reliance Energy with Anil. For RIL they have to manage by consensus.

Bloody battle among the brother can be really dangerous. It would not only destroy the Reliance growth machine (http://neerajgutgutia.blogspot.com/2004/05/stretch-leverage-ck-prahlad-as.html) but would make Indian corporate sector weak. Already FIIs have more than 50% stake in companies like Infosys and ICICI bank. TATA group do not hold substantial shares in their own company (apart form TCS). Today FII own 21% of the top 50 stocks…we don’t want a situation where even though Indian companies conquers the world they end up being controlled by FIIs.

The factor now need to be looked into is the maze of companies (http://neerajgutgutia.blogspot.com/2004/06/rs-17262-crore-fraud-reliance.html) through which investment has been made in Reliance group. Many of these family’s privately owned companies are not registered in India. This maze is a natural result of complicated regulatory system, to avoid which such maze is created but real cost of which is felt when family feud like the present one starts. It needs to be seen how his maze can be cleared and the whole group holding can be reorganized without attracting substantial capital gain and other such taxes. Without clearing this maze long term solution won’t be possible. Once the knowledge about the maze is available in the public domain we may come to know about many goldmines hidden in Reliance balance sheet.(http://neerajgutgutia.blogspot.com/2004/10/who-is-funding-iris.html)
I am waiting eagerly for SEBI and DCA to step in and ask for more transparency.

Investment tips: Reliance Industries is still a great investment. According to my calculations its worth at least Rs. 800 a share. Refinery and chemical business is as strong as ever. And the real goldmine is its 45% stake in Reliance Infocomm which once listed may become more valuable than the parent itself.(http://neerajgutgutia.blogspot.com/2004/09/become-venture-capitalist-to-reliance.html) As for Reliance Energy Ltd. I feel its bit overpriced as for now and secondly the family dispute can badly affect the future investment plans like Dadri Power project etc. Considering the uncertainty involved Reliance Energy is not a stock to invest in right now. I can’t help but mention than Project implementation man at Reliance is Mukesh and there is remote possibility that Mukesh would be looking after Reliance Energy in future. On the other hand Reliance Infocomm would remain within Mukesh’s control and the project has already reached a level where project implementation risk is low and upside is high. (http://neerajgutgutia.blogspot.com/2004/07/telecom-revolution.html)

I sincerely hope this dispute is settled and the group resumes functioning as a single integrated organization as always. Its my dream company and I wont like my dream to be broken in parts. The group has potential to implement many great projects (http://neerajgutgutia.blogspot.com/2004/05/next-pill-of-viagra.html)
and a division among the brothers can destroy all that.

Neeraj Gutgutia

Refining margin of $ 8 per barrel!!!

2004-10-26T13:54:00.000+05:30

Today’s Economic Times mentions that Reliance’s refining margin for this quarter has been around $8 per barrel. The international standard is around $1-1.5. To surprise you further ONGC’s per barrel exploration and production cost comes to around $8!!! So the question is how Reliance has managed such high level or refining margin? The margin is too high to be credited to efficiency alone. The reason is foolish government policy of taxation & exemptions, inefficiencies of public sector refineries & Cost plus pricing of oil products. And who is bearing the cost of government foolishness and inefficiencies??

“Dig holes to fill them up again”

2004-10-16T16:54:00.000+05:30

Today derivatives are the in thing…equity analyst and people who deal in options, futures and other derivatives are one of the highest paid people in the economy. And which sector in the economy is the biggest paymaster – Banking. Because of this banks are the most sought after recruiter at any B-School campus.

Somehow I have serious reservation about bank employees commanding a premium in the economy. I have a feeling that these high rates are due to high profitability of private sector bank which has less to do with their own efficiency and more to do with the capability and thought process of our policy makers and the RBI. Because banking is highly regulated industry with multiple laws and regulation the private banks that are there are enjoying super normal profit at the cost of public sector banks and economy as a whole. The interest rates are artificially high and interest rate spreads are blasphemous. Due to such high interest rates the ‘real’ economy has to suffer. Such high interest rates make the discounted cash flow statement look awful. Many more projects would have been implemented in the country if the interest rates have been realistic.

Due to the banking sector inefficiencies the ‘real’ economy has to face double blunt. First – costs are higher making project unviable and secondly good and talented people do not work for this sector as salaries are comparatively lower.

Don’t we see simple things? We all need proper roads, better water supply, regular power supply etc. There is unlimited demand for these things and we are trying to sell things which consumers don’t want to buy. We go on advertising, pushing the product till the time the consumer ‘perceives’ the utility of such goods and sell them. Why can’t we make and sell simple basic requirements of human beings?

Although I am a chartered Accountant and MBA from IIM (which is the best possible qualification to get a treasury job) I feel that day trading, Short Selling, Technical Analysis etc. are all wasteful activities on the part of human being at least in developing country like our where even the basic human needs are unsatisfied. May be I belong to the old school of thought like those of Peter Lynch and Warren Buffet who believed that options and future are not only bad but ought to be outlawed and done away with.

Well there has to be an upside to this. It can’t be that the whole world has gone mad. The best explanation I could find was Keynes solution to unemployment. “Dig holes to fill them up again”. First create a product which is not required, then employ thousand of people to sell the product, in the process providing them with disposable income and then make them ‘perceive’ the utility of the product and sell it to them. As the velocity of money increases, income of everybody increases, everybody consume more (‘perceived’ beneficial goods) and hence the standard of living increases. Is this how we can become a developed nation??
Wont't you agree that when market leaders like L&T (whose core business is engineering & construction)& almost the whole of banking sector (whose core business is lending) is making more profit from treasury operations rather than their core business there is some problem in the economy.

(Note: The author has reservations about the utility of Equity Derivatives only...The above comment is not for commodity derivative whose utility is acknowledged by the author)

Who is Funding IRIS?

2004-10-16T13:35:00.000+05:30

One of the founder of IRIS came down to our campus yesterday to sell his company to us for recruitment purpose and I must admit it was one of the best sale pitch I had seen by any company during the last two years (and I have seen many).

I knew of this company only because of their website (www.myiris.com) and to my surprise they claimed themselves to be the Bloomberg or Reuters of India!!! And to be frank he somewhat convinced me.

What made me interested was that he was frank….living to its information company image he was providing us with full info without those manipulative packaging. He went to the extent of telling that they were in deep crisis last year and also about how most of the IIM grads don’t last there for even one full year. He packaged it by saying “we are the favorite poaching ground for big companies”.

Few of his comments were really interesting. The best one was when he quoted Keynes …it was something like this… “If job have to be created….start digging holes and filling them….” And he remarked that most of us are doing the same in today’s world (he was referring to how we first waste effort creating barriers to info and then companies like theirs try to bring down those barriers and collect info). More on this comment in my next blog.

The second one was “I want to retire in 5 yrs….the joy of entrepreneurship is if you become really rich in a short time….and short time is around 5-10 yrs” I must say I cant help agreeing with him.

But the thing that made the whole effort interesting when he held back information about the venture capitalist who funded them out of the “deep crisis”
The info he disclosed:
1. One of the top ten companies of the country
2. One of the most aggressive company
3. Its not Infosys or Wipro
4. The group has 6 companies listed on the stock market

I think these clues were a give away…and when I asked him directly whether its Reliance he was caught off guard and refused to reply…don’t you think it’s a give away.

It has to be a group like Tata, Birla or Reliance to have six company listed on the stock exchange and also be among the top ten companies of the country. (Six listed companies – Reliance Industries ltd., Reliance Energy Ltd, Reliance Capital Ltd., Reliance Industrial Infrastructure Ltd., IPCL and I think Reliance Telecom Ltd.) But the biggest clue was the word “aggressive”. Are there many company in the country that can be called aggressive – maybe Bharti apart from Reliance I can’t think of any other group which can be called aggressive. (If I have to place Tata’s and Birla on a scale with one end as Aggressive and other as Impotent…I would place them closer to the later than the former).

So what can be the intention of Ambanis behind funding a company like IRIS? He says the VC is interested only in the money....I cannot disagree more. Well another string for my research on Reliance!!!

Logic to Bharti's madness

2004-10-15T23:02:00.000+05:30

Bharti group has outsourced its network to IBM for maintenance and would concentrate on marketing from now on.
http://www.businessworldindia.com/oct0404/coverstory01.asp

Why he did it...what's the real purpose behind the move??

I think the real issue is restriction on FDI in telecom by government and Bharti knows that if something is not done fast they will loose the edge to corporate with deeper pockets like Reliance & Tata. This deal can be called the ’back door’ entry of FDI. Now IBM will be making all the capital investments and Bharti will be making only payments for service on the monthly basis which mean he do not have to worry about capital investments...interest rates etc.

But what Mr. Bharti needs to watch out is the change in billing mechanism in the industry. If telecom also shift to fixed monthly billing like broadband and cable Tv (its will happen sooner or later)...this deal maybe a milestone around Mr. Bharti neck. Usage level will increase to abnormal levels forcing them to pay huge sums to IBM. I have not gone through the fine print of the agreement hence can’t give a conclusive judgment but most probably this agreement has not considered that probability.

Beaten the Ambanis

2004-10-01T22:45:00.000+05:30

Once during a press conference one of the reporters asked Anil Ambani “Is there any business where Ambanis have tried their hand and had not been successful?" on his Anil Ambani Replied yes and asked them to make a guess.

Make a Guess.

When none were able to make the right guess he disclosed - Print Media. During the height of Indian Express War against Reliance they tried to launch their own daily 'Observer' to counter attack by Goenka and team. However it never took off and Anil Ambani was gallant enough to admit it.

So how did I beat them? Well....My I-magazine within first month of launch has become self sustaining. I received a cheque of Rs. 275000 as adv. booking for the next issue which means a profit margin of almost 50%!! Beaten them at it, Right??

Jokes apart, it feels great. One real business venture I undertook and it is into profits. By the time I leave the institution there would be a reserve of few lakhs in the publication fund. The whole I-magazine episode is now not only a great learning experience but also a great confidence booster.

Become a venture capitalist to Reliance Infocomm

2004-09-22T20:16:00.000+05:30

Dream of making big money at the stock market ...well the history says big money can be made only by venture capitalist who bet big on a company during its initial days....high risk and high return.

Now I will tell you a low risk high return option!!! Return of a new venture and security of a blue chip!!

Invest in RELIANCE INFOCOMM VIA RELINANCE INDUSTRIES LTD.

Reliance industries ltd. holds 45% stake in Reliance Infocomm and another 45% is held by the Ambanis. Now look at the valuation of Reliance Industries Ltd....its not valued enough even for its petrochemicals, oil and gas and Reliance Energy investments leave away Reliance Infocomm. Pull out any stock analyst report and it will mention that separate value of all these Strategic Business Units (SBUs) except Reliance Infocomm is more than the current stock valuation.

So what I forecast: In a year or so time Reliance will be coming out with a public offer for Infocomm. Most of the share on offer will be one held by Ambanis. Of course they will be making a killing on it but the shares will be offered at a very high price in the market (valuation of Infocomm shares is discussed below) which would push up the valuation of Reliance Industries Ltd because of its 45% holding in the company.

Now let’s see the valuation or Reliance Infocomm. Let us take Bharti as the standard. Reliance Infocomm has more customers on its list compared to Bharti. Secondly due to back door entry by Reliance license fee commitment etc is also very low. Above all it managed to make cash profit in the first year of operation itself. Reliance Infocomm revenue today must be around 5000 crores (83lakh customer*500 pm as bill*12 months). And this is only from voice business. Reliance is about to come up with endless businesses leveraging on its optic fibre infrastructure including...broadband, video conferencing, video on demand, Internet protocol TV, cable TV, ATM network facility to banks, Broadcasting facility to channels etc. It is expecting that within 5 yr time voice will be contributing only 10% of the total revenue of Infocomm. And all these does not need much of incremental investment in infrastructure which Reliance has already put into place for voice business like optic fibre, Webworlds etc .Added to this, currently Reliance is operating in only 1100 towns and will be reaching around 5000 by the close of the financial year. This should lead to substantial increase in the voice business (expected to reach 1 crore customer by the year end). Broadband business also should contribute lot of revenue. My estimate is by the end of 2006 it should be at least 1500 crores (25lakh customers*500 per month * 12 month).
Hence by the end of 2006 I expect Reliance Infocomm to touch revenue of at least 25000 crores and a profit of around 10000 crores. Going by the PE ratio of 10 Reliance Infocomm should be worth 100000 crores by the end of 2006. Today total market capitalization of Reliance is around 80000 crores!!! Considering 45% stake in Reliance Infocomm alone should contribute 45000 crores to Reliance Industries capitalization...which means other SBUs like Oil and gas, Petro-chemicals, Energy is worth only 35000 crores!!!

Not to mention you may like to be venture capitalist to Reliance Energy Ltd. also (where Reliance industries hold more than 51% stake) after reading the synergy between the Infocomm and Energy business in my cover story in I magazine.

First ever Business Magazine from any of the IIMs

2004-09-17T10:44:00.000+05:30

I did it!!! My long cherished dream has at last come true!! Few days back we launched the first ever business magazine from any of the IIMs – ‘ I ’ The Business Magazine.

I had been working on this project for more than a year. Had sacrificed a lot for it...studies, freaking around with friends etc, etc. But it was worth it. Receiving raving reviews from everybody...batch mates, juniors, faculty, friends, alumni etc. (the best one -"...its inspiring even for us..."-A faculty member)But above all it’s the satisfaction of being able to achieve something which everybody discounted as an impossible dream.

In the end, this project gave the same feeling as the CA final exams. A great milestone to achieve…will exchange nothing for it….but will never like to do it again for anything. One of the most prized achievements but at the same time effort required was something too much to do very often.(and then law of marginal utility also applies) But then first time is the difficult part…now it will be easy. You learn a lot in the first time itself. I already feel I am high on the learning curve.

Another major reason for this great feeling (I fell like on top of the world) is that I had been able to publish the Reliance Infocomm & Energy Synergy story which I had been trying to get published for more than 2 years now. I always knew it was a big idea and had a feeling that it would be my “big break” (if I use the term I used in the article – Defining Moment). In the past I had showed around the story to many people, I was also able to sell the story to Tony Joseph and Prosenjit of Business World…worked with them for months on the story but could not publish it only because I were not able to convince them that something so big is happening and a novice like me is breaking the story to them…they thought its too good to believe…. there must be a catch. When I used to mail this article to editors, industry people etc..I always had a fear that someone will steal the idea and publish the article in his own name…there I was wrong …I feel like quoting a quote I read somewhere few days back

“Don’t worry about people stealing your Ideas. If your ideas are any good, you’ll have to ram them down people’s throats.”
-Attributed to Howard Aiken

This magazine publication project was a major learning for me. Few of the things worth mentioning are:

1. Never compromise on quality…if the quality is not good its not even worth the effort, time and money you put into it

2. Donot waste too much time planning…just do it…planning can be done on the move too…but basic planning is very important

3. ‘You need not be a GENIUS to achieve your dreams, you need to be a MANIAC’

4. Its better to pay and get work done….but pay doesnot guarantee quality and timely work….you need to be know the art of getting work done from others….and neeraj you need to work a lot on that….you are too soft. Here I would like to mention once my friend Bimal told me “Art of negotiations and art of getting work done from others…these are the two most important virtues one need to have in corporate world”…I need to say that day I thought otherwise but today I admit he was dead right.

5. Love Kills…if you don’t enjoy the pain dont get into it. (Love for anything work…dream…)

6. Another skill I need to work a lot on is related to computers. I am still not great with computers

7. Another thing I lack is the ‘polish’ that others have. The way to talk sweetly…which gives a better impression….helps in negotiations and selling ideas(no matter how crap they are). But then this project would not have been successful if it was not for my aggression and result oriented attitude. I still donot have respect for process oriented approach….I feel they are good for repeat works…but for something new you need to roll up your sleeves and dirty your hand…you cant look good and do a good job at the same time.

8. Carrying on from the last point…for most people its only the looks that matters….I have been getting great reviews for the magazine, but I know most of them is due to the great looks of the magazine….most of them have not read the articles…and have no idea how big is the cover story or any other article.

9. Another major learning is ‘we tend to overestimate the demand of product we consume’…because I read a lot of magazine I thought other also like to read good magazine…I intentionally opted for magazine rather than journal because I wanted to make it interesting for the reader. Although I will be able to beat the best journal from the IIMs in readership with this magazine …still the readership is not satisfactory. Now I know why Harvard decided to launch a pornographic magazine.

Founders - Prashant, myself and Stephen

10. It feels great to be the FOUNDER EDITOR of a business magazine at the age of 25. The day we launched the magazine I was wondering why I had been able to achieve this success although there are better people around. I think it was due to my habit of dreaming different dream…When the most talented people were wasting time formatting & decorating project reports which had added like value to them, decorating ppts, reading senseless textbooks just to get marks, I was working on something which has not been done before at any of the IIMs.

“WHY TO FIGHT FOR EVERY INCH OF EARTH
WHEN THE WHOLE SKY IS THERE TO CONQUER”
- Neeraj Gutgutia

Dream Next - Book on Reliance Business Strategy

Cure for all Reliance Infocomm problems

2004-07-21T13:22:00.000+05:30

Start billing customers fixed sum per month with no per minute billing. With the new TRAI recommendation on ADC this is now possible. Other telecom players may not be willing to shift to "Bill and Keep system" but once Reliance is out with this scheme - sooner or later they will have to.
Start charging Rs. 1000 per month (or higher if Reliance network is not prepared to handle sudden surge in number of connections) and bring it down to around Rs. 500 once "bill and keep system" is accepted and network is prepared. Offer one time amnestry scheme to defaulters by giving them oppurtunity to shift to this scheme. At the same time offer customers option of shifting to better scheme if offered in future.
This will help Reliance avoid BILLING which has become a major headache. It will also help in eliminating bad debts, and reduce customer complaints substantially.

Reliance - Stretching it too far. IT'S SUICIDAL !!!!

2004-07-19T13:18:00.000+05:30

Reliance is manning all it retail outlets like web world, Gas stations, etc. with its own staff. These employees will either be on the rolls of Reliance industries/ Reliance Infocomm/ Reliance Energy itself or smaller little known group companies.
I believe Reliance is stretching its strategy of SELF - RELIANCE too far. First it would be a major Human Resource excersise and secondly it may look like a Public Sector Enterprise. Soon time will come when excess labour force (or unproductive labour force) would become a heavy baggage for the Reliance growth machine.
It would also lead to diluation of brand value of Reliance as a recruiter. Similar problem is being faced by IBMs and Morgan Stanleys of the world who are recruiting people for call centers under the flagship company Brand name in India.
Its time Reliance starts the unlearning process. SELF-RELIANCE has worked for them in past and is one of the major reason for their success. But retail business is a different ball game. Its time to learn the virtues of OUT-SOURCING

www.flagtelecom.com

2004-07-18T01:07:00.000+05:30

Check this out:
www.flagtelecom.com
FLAG TELECOM ANNOUNCES MAJOR NEW MIDDLE EAST LOOP TERABIT/S SUBMARINE CABLE SYSTEM WITH LINKS TO EGYPT AND HONG KONG VIA INDIA first self-healing submarine loop network in the Gulf region with links to Egypt, India and Hong Kong · 15,000 km terabit/s submarine system to be in service by early 2005

Soon India Telecom infrastructure would be better than any other country in the world

Telecom Revolution

2004-07-18T00:55:00.000+05:30

TRAI has decided to charge Deficit Access Charges as percentage of total bill rather than 80 paise per minute of STD call as in the past. This will have a far reaching effect
1. Fixed rental (per month basis) and no pulse rate for calls within India
2. All India one number
3. Free roaming anywhere in India
4. Bill and Keep method of settlement among telcos

All the above is not far off. Consumers are in for treat and telecom density in India is about to shoot up.

Go for Cash

2004-06-18T13:58:00.000+05:30

In India it pays to deal in cash (or cheque) rather than going in for trade credit facility. If you have a habit of making your purchases on credit you are not only paying bank interest, risk premium and margins for these banks (which are relatively very high in India) but you are also incurring additional tax burden!!!

Taxes like excise duty, sales tax etc. are determined on the basis of selling price of the goods. If you are making regular purchase on cash the supplier would be willing deduct these costs from the price of the goods. Although costs like interest cost is normal and there is opportunity cost for the fund you use, costs like extra tax liability etc. are additional and can be saved. Added to that paying in cash upfront wins you tremendous negotiation power and market credibility which help you attract the best suppliers.

Same is true when you are selling goods; try selling for cash you will be able to give a better deal to your customers in comparison to one who offers credit facility. This is the strategy being followed by Reliance group and that’s why they not only get best offer for the purchases but are also able to give one of the best offers to the customers.

Time - The fourth dimension

2004-06-17T20:28:00.000+05:30

No its not about Stephen Hawkins or any other science fiction book. It’s about management. It is generally seen that for any purchase decision in business the three important aspects people look into is cost, quality and reliability. With cost getting the highest attention. The major aspect people generally forget to consider is TIME. You must have seen people wasting lot of effort and time to gather information about things which donot deserve the time spent. The best example in this case is government organizations where rules insist on tender and atleast three quotations. The amount of time they waste to confer to this silly rule (which have become necessary due to rampant corruption) that they become uncompetitive in comparison to private players. One single reason of Reliance faring better in all public corporation dominated sector is their focus on time. And this is sustainable competitive advantage as considering the Indian mindset and the rampant corruption they can’t do away with this rule.

L & T De-merger Puzzle

2004-06-16T00:22:00.000+05:30

I had invested in 250 shares of L& T of Rs. 10 each. Due to recent decision of de-merger they have sent me in replacement 100 shares of UltraTech CemCo Limited of Rs. 10 each and 125 shares of Larsen & Toubro Limited of Rs. 2 each.
Before de-merger face value of my investment was Rs. 2500 (250*10) now the face value has reduced to Rs. 1250 (100*10 + 125*2). As far as I know, a company cannot reduce its paid up capital until unless it need to write off its losses. And L & T is a very profitable company that does not have any loss on its balance sheet to write off.
What accounting entry they are making for the above. Are they converting paid up capital into capital reserve? Can anybody tell me whether it’s legally correct?
Even if its legally correct does it make sense to de-merge the company when it leads to 50% reduction in capital? What assets they are writing off that has lead to 50% erosion of capital. Is it in the interest of the shareholders or is it something to do with professional management trying to retain control? 20% shares are being transferred to employees fund...at whose cost??

Telecom Sector: The artificial barriers to growth

2004-06-03T11:26:00.000+05:30

My commitment is to the consumer, to growth and to do justice; I simply follow these three goals in that order.
- Mr. Pradip Baijal BusinessWorld 10 November 2003.

We agree with Mr. Baijal that Indias telecom policy should have these three goals and in that order. But we would like to bring to notice few government policies and regulations that are working against the goal of consumer interest and growth. We request the government to look into it and if found fit make required changes.

1.Call carrying charges:

Call carrying charges are charges charged by a telecom player from another telecom player for carrying calls from one place to another. According to which suppose a company like Bharti, which has operation both in Delhi and Punjab, to carry a call of an Airtel customer residing in Delhi to Punjab will have to pay national long distance operator (BSNL) call carrying charges just to cross the state border(note that Delhi and Punjab share the same border). It leads to increase in complications and hence cost. The only rationale in doing so is to give unjustified advantage to the government owned telecom company - BSNL.
If government does away with call carrying and call terminating charges, at the same time making it necessary for each player to provide interconnectivity, bill and keep system of settlement of accounts among the telecom players will automatically follow. This will save a lot of cost and effort for the telecom players in billing, settlement of accounts among themselves etc. It will also provide a lot of flexibility to telecom players to design tariff structure as per the needs of its clients. It will help the small players to survive who will cater to the niche market with customized services.

Deficit User charges (DUC)

This is yet another innovation from the stable of the Indian telecom regulatory authorities. Its motive is to increase telecom density in rural areas a social cause. For this the government has introduced an additional 80 paisa per minute charge on STD calls to be paid by telecom players to BSNL. This is to compensate BSNL for losses it has to suffer in setting up phone lines in rural areas.
In fact, with the latest optic fibre infrastructure in place, the cost of carrying a call whether local or STD is the same. It doesnt matter whether the call is from your house to a house on the other side of the road or to a place 3000 km away from your house until unless its in India2. This artificial differentiation of Local & STD is therefore not required. If DUC charges are done away with telecom players will be in a position to provide one charge for the whole country, something that many mobile players had started before the introduction of this new DUC charges of 80 paisa. I need not mention the major gainer will be the customer.
Another benefit of doing away of DUC charges which will in effect lead to all India one charge will be that telecom players would be able to provide one number for whole country. Words like roaming, SDCA, STD would become obsolete.

Technologically with optic fibre infrastructure in place there is no barrier to Growth (spectrum utilization rate in India is too low in comparison to other countries; hence its not a limitation.) 3. A parallel can be drawn between cable television industry and telecom industry. As in cable television industry once the cable is in place it does not matter how many hour the customers actually watches the television, similarly in the telecom industry it should not matter the number of hours a customer actually talks over phone. We pay around Rs. 200p.m for cable television and receive/consume much more bandwidth than we consume while talking over phone. Once these artificial barriers are removed we can expect telecom players to provide unlimited talk time to anywhere in India at a price as low as Rs. 200p.m. Like in cable television where pay channel like Discovery Television charge premium for niche content, extra charges will be there for value added services like internet on telephone etc. We have witnessed how not only cable television industry grew exponentially but also many related industry like private channels, non-film music industry, etc. took off. Same can be expected if these artificial barriers are removed and telecom industry start following the billing system similar to the cable television industry. Industries like movie on demand, two-way television, net on cable, Internet on mobile etc. will come up. Hence these artificial barriers are not only barriers to growth of telecom industry but to the growth of many other new age industries.

Suggestion: The first reaction to the above by a typical babu in government will be -then from where will government get its revenue to meets its social obligations, blah, blah? The best way government can do so without harming the customer interest and growth much is by charging all kind of taxes, fees, charges etc. as a percentage of revenue4. For example if a telecom player is charging say Rs. X for unlimited talk time anywhere in India Government can charge:

10% of the revenue as sales tax.
10% as license fees
10% as Deficit user charges
20% as other charges

Total 50% of the revenue will be collected by the government as various taxes, fees, charges which is quite close to the share government currently has in the revenue of telecom players. If a telecom player requires minimum say Rs. 2005 per month it will bill the customers Rs. 400 p.m. This way government will be able to collect Rs. 200 per customer.

The benefit of the above will be

1. There would be lower entry cost in the industry that would increase competition and help small players survive
2. Lot of billing, regulatory cost and effort would be saved
3. Government will automatically get share in revenue arising out of industries that are yet to develop without coming out with new legislations
4. Government revenues will grow with the telecom industry
5. Regular disputes arising out of policy implications would be avoided
6. Telecom players will be able to take long-term decisions without fearing change in policies
7. Assured revenue for the government and the telecom players
8. Customers are better informed and served

Explanatory Notes:
1. Initially few players might not have agreed to bill and keep system as this system make entry of new player easier. But now with increased competition in telecom entry barriers are no longer relevant.
2. In fact it does not make much difference even if the called place is located outside the country. The costs are the same just like in the case of internet where it does not matter whether you are sending email to your friend in the same town or to a friend in U.S.A. But again in international calls artificial barriers like regulatory laws of that county, carrier charges etc. come into play.
3. Spectrum utilization rate in China is twice than that in India. Considering the growth estimates available spectrum scarcity is nowhere in the horizon. Secondly new technologies are coming up which are increasing spectrum utilization every day.
4. There would be fixed fee for spectrum as its availability is limited and if its availability is made free there wont be efficient utilization.
5. Continuing with the previous conjecture that revenue of Rs. 200 per customer will be satisfactory for the telecom players. They will try to increase this by providing value added services.

Bibliography:
1.Spectrum: Its the control over airwaves that are required to provide wireless services.
2. All India one charge: Charging similar charge for local and STD calls. Not discriminating between a local call and an STD call.
3. Bill and Keep method: Under this method the telecom player whose client is originating/making the call bills his client. If the call is terminated on network of another telecom player he does not charge anything to the first telecom player as termination charges. In return when the call originates on the network of second telecom player the first telecom player do not charges call termination charges.
4. Call termination charge: Charge paid by one telecom player to another for connecting to a telephone in its network.

NEXT PILL OF VIAGRA

2004-05-31T12:29:00.000+05:30

Anil Ambani once commented that after Jamnagar Infocomm project is like next pill of Viagra for their project implementation team. Any guesses after Infocomm and Reliance Energy, what will be the next pill of Viagra????

Well my guess is MEGA KNOWLEDGE CITY. Whatever Reliance does is Mega and hence we need not stress here that this also will be mega. Just to give an idea, last township they build was Jamnagar...and the total size of Reliance Jamnagar is half that of Mumbai!!!! This knowledge city will be much bigger.

So what will be the knowledge city like?

It will be city where the Ambanis will invite the Stanfords, Whartons, Harvards, IIMs, IITs of the world to open their branches. This city will also house research centers for all major technology companies of the world. Hyderabad, Bangalore will be passé.... Major IT, Biotech. Pharma giants will queue up to have their research centre here. Apart from that the city will house lot of Infotech companies (Infosys, Wipro, TCS etc.) and BPOs. The city will also have all major schools and graduation colleges. And some time later many corporate houses will shift their headquarters to this city.

The next question is why all major companies will line up to establish their office in this city?

The answer is infrastructure and talented manpower. India has the advantage of large pool of talented manpower but suffer from lack of proper infrastructure. Reliance will be leveraging this talent pool and at the same time fill the infrastructure gap. The city will have the advantage of Reliance optic fiber for communication, uninterrupted power supply from Reliance energy. Apart from that the city will have state-of-art infrastructure in the form of Mass rapid transport system, great roads, International airport, rail and road connectivity etc.

And how do they plan to finance the project?

All state government will be fighting with each other for getting this city established in their own state. The government will offer land at a throw away price in hope of attracting huge investments and creating lot of jobs. They will also offer lot of tax sops etc. Reliance will create a master plan of the city and start offering land on lease to these institutions to open their branch. Reliance will not only offer to do the construction work but will also provide them with cheap finance. These institutions will be given liberty to design their building as per their requirements but it should fit the master plan. Participating companies, institutions will make their own investments while Reliance’s major investment would be in the city infrastructure, which would be run on commercial basis. As the city is being built from scratch the construction cost of city infrastructure would be relatively very less and part of the capital cost will be financed from lease deposits received from these institutions. You may also see builder like Sahara group building small townships within the city and selling out flats. The economics of the city is based on two basic principles:
1. Buying unoccupied land at wholesale (concession) rates and selling it at retail rates.
2. Investment in infrastructure and attracting of major international players at one place will increase the value of land many times over. (Cluster Advantage)

According to our calculations the investment required by Reliance group alone in the project would be more than 50000 crores i.e. higher than any other project undertaken by Reliance so far. Apart from that participating companies and institutions will be investments in their own infrastructure.

So, are you able to dream how the city would look like? Would you like to be a part of the dream? Would you like to live in this city? Don’t forget to post your opinion. Its on first come first serve basis. Those who post their opinion will get preference in bookings.

Stretch & Leverage (C.K Prahlad) as a strategy with Reference to Reliance group’s strategy

2004-05-27T17:26:00.000+05:30

It is generally believed that corporate races like quality, efficiency, growth etc. have no finishing line. But it is also true that it’s very difficult to motivate people to run in a race that will never come to an end. Reliance is running same race for growth. Their corporate ambition is obvious from their punch line “Growth is Life”. To motivate their employees run this unending race what they have done is they have decorated each milestone with a finishing tape. Apart from that they have strategically separated monotonous less crucial parts or the racetrack into separate race to be run by separate runners.

According to Hindu Mythology the job of creation, maintenance and destruction has been divided among three gods Brahma, Vishnu and Mahesh respectively. In the similar fashion Reliance had separated the job of creation and maintenance. Job of creation is given prime importance at Reliance and had been traditionally headed by Dhirubhai Ambani and now is being headed by Mukesh Ambani. Maintenance job is given a step motherly treatment at Reliance and is generally headed by professional managers while member of the Ambani family get involved in only exceptional cases. This separation of task help them to saturate resources for achieving the critical goals at the same time managing to stretch the resources.

As stated earlier Reliance group prime focus is on creation job. Creating new projects bigger than any previous project handled by them is what drives them. The strategic intent is to build grassroot Greenfield projects that are of global standards. And this challenge of creating something globally benchmarked is what drives the team emotional and intellectual energy for the journey.

For the creation business they are ready to commit most of their resources that make the resource not only ‘fit’ with the emerging opportunities but also at times ‘saturate’ it. On the other hand they stretch the resources to the maximum possible in the maintenance business. They have created a team of their best people into a project implementation team who run the growth race with the imported shoes and equipment. For this team organization’s best resources are committed. For them each project is like a milestone which is celebrated when reached and a new race to the next milestone starts immediately afterwards. It is best brought out by Anil Ambani’s words when he was explaining the critics why they took up Infocomm project after the Jamnagar project. His explanation was “ After Jamnagar Infocomm is like Viagra for our project implementation team.”

To explain how it operates we take an example. Initially when Dhirubhai Ambani turned bullish on Polyester, polyester market in India was almost non-existent. Apart from setting global scale polyester capacity he needed to create demand for his products. He committed all his resources. He went to the wholesalers and retailers with most lucrative offer. He offered them 90 day credit period for selling polyester and at the same time offered to bear all losses in case wholesalers has to face one but let them keep all profit. As a result traders started promoting polyester and soon polyester gained the confidence of the market. Once the market creation job was over he soaked away all his resources and diverted it to other creation business. Now Reliance was offering his goods only against cash upfront but as the market has been created there were enough takers. The control was now in the hand of maintenance guys.

Another way to look at their saturate-soak-stretch strategy is to look at their debt equity ratio. Reliance group due to its founder philosophy has been a conservative player when it comes to debt-equity ratio. When the group is in process of creation of a global scale project the group debt ratio stretches to the maximum tolerable level because they stretch its financial powers to saturate the project. But as soon the project is over the resources are soaked away and again debt- equity level is brought down to the acceptable level.

They operate on the general military philosophy that no matter how strong you are you never open too many fronts for war. And when at war your best people are out there fighting the war while home affairs can be looked into by lesser mortals. Building global project always suffer from natural stretch like lack or experience and expert manpower, lack of technical skills, uncertain environmental factors etc. which are more or less beyond the control of most players. They make it up by saturating resources, creating redundancies to keep a tab on uncertainty. The best people who may have done a better job in the maintenance business are called to fight the war i.e. to work on creating the global scale projects. While people who are left, are made to look into the home affairs i.e. do the maintenance job or look after the regular running of established business.

This is how Reliance manages to achieve what appears to be impossible given the resources on hand. It’s the resourcefulness of the management, ability and technique of allocation/deployment of resources that help them stretch their resources into achieving the group’s growth intent.

It is well known that Growth as an objective cannot be a motivator in itself as employees can’t see the finishing line. Growth has to be defined into milestones that are challenging enough and can channelize the emotional and intellectual energy of the employees to achieve the organization goals. Hence projects like cracker at Hazira, integrated grassroot refinery at Jamnagar, state of art optic fiber infrastructure for Infocomm, deep sea Oil exploration or biggest gas based power plant act as goals which motivate the whole team to stretch beyond what is considered realistic to achieve the impossible. For the team it becomes the ultimate goal, till they achieve it, while for the organization its just another milestone, which motivate it to dream even bigger.

On the other hand the maintenance team has to run the monotonous race. Neither milestones are as clearly defined nor they are celebrated in the similar fashion. Apart from that, the work is also not that challenging. What motivate the employees more than the financial or productivity target here is individual target of graduating to the celebrated team of creators. This is the reason while performance of Reliance creation team (project implementation team) is way above industry standard the performance of the maintenance team is just around average.

Although Reliance practices resource leverage both in creation business and maintenance business it is more evident and more rewarding in the creation business. In maintenance business method of resource leverage is more or less similar to what other business houses practices. They hire experienced people at the least cost possible, expedite the cash flow cycle, try to operate the plant and machinery at more than the capacity, recycle the skill and expertise gained by an employee in one job for another. They pay the employees less and make them work longer hours. This is complimented by advanced plant created by the project implementation team to produce above average operational results.

For Reliance the real leverage benefit come from the creation business or from project implementation job. Aspects of their resource leverage in project implementation is discussed as follows:

The first step to resource leverage involves targeting, focusing, and converging. Separation of the project implementation team is the result of consensus building on strategic goal. Achievement of Convergence is not difficult at Reliance as such decisions are taken at the top by the Ambanis. At the project creation stage itself they create capacities more than the market can absorb. Hence subsequent investment in the current business is not a high value addition investment and they know that. Hence they Target new business that can give them super or more than normal growth. While their project implementation team is working on ‘the’ project, management is strategically conducting a pilot study in other business opportunity by investing a small sum. Till the current project is not completed the Focus stays on that project and as soon the project is completed the focus sifts to the next project.

The learning at Reliance is high because turnover in Reliance project implementation team is very low and the same team or project implementers work on all new projects using learning of previous project in the new project. At the same time, as they create the project and shift to the next project (don’t do the maintenance job), unlearning is not a problem. Reliance had been able to implement project in high technology area like Telecom with a team with experience only in petro-chemical area because of this reason. Unlike the common belief the team developed expertise not in petrochemicals but in project implementation that was leveraged for other project implementation in completely different fields. For this they borrowed the best technology available from the Bechtels and Duponts of the world. They rather then taking them as partners purchased these technologies from them adopted the technology to Indian condition and innovated using these technologies to get better results. It was the competence of their project implementation team to learn the expertise of these international giants fast and internalize it. This helped them lower the costs in the long run at the same time it help the organization accumulate expertise in project implementation. This was also made possible as top management had faith in their team and had the confidence to give them liberty to innovate. They recycled the project implementation expertise developed by the team for creation of many mega projects leveraging on the skills learnt on the last job. Reliance paid the members of the project implementation team better than industry standards, which helped them in protecting the project implementation (skill as a resource) from their competitor. Apart from this ability to come up with new challenging projects on a regular interval also helped the company in retaining its talented manpower. This is in contrast with the treatment the members of the maintenance team get.
In their whole strategy of resource leverage the most important chain is the strategy of expediting things even at the cost of other resource. When it comes to project implementation they consider time to be the most important factor and don’t believe in optimization of other resources at the cost of time. In fact at times they are ready to accept certain amount of ‘slack’ in order to make sure the project is expedited. By expediting they are not only able to run resources like cash flow few extra mile they are also able to leverage their most critical resource – the project implementation team by making them working on more projects. The focus on time and targeting of completing the project in the shortest possible time also provide other advantages like first mover advantage, product to market time saving etc.

The above-described ability of Reliance to stretch and leverage its resources is the reason why Reliance had managed to become the biggest private sector company in a short period of 27 years.

Neeraj Gutgutia

Reliance: Integrating Telecom and Power

2004-05-03T19:15:00.000+05:30

Sick of overhead power cables
This article describes how Reliance will be leveraging the 60000 Kms of Ducts it had laid for Infocomm venture for Power distribution. This master strategy will help Reliance save thousands of crores apart from saving lot of time.

When was the last time Reliance group invested substantially in a sector, which is not related to its core business? What made Reliance invest 25000 crores in a sector which is totally different from its existing business? It’s surprising considering group’s reputation for backward and forward integration. Or is it that we are missing out on the relation?

FLASHBACK: Mumbai, 13th June 2000, Reliance 26th Annual General Meeting: Mr. Ambani lays down before the shareholders group’s plan to invest 25000 crores in Infocom sector and also in the group vision statement mentions the plan to become numero uno in Power sector. To achieve this he mentions the group plans to reach 10000MW of power generation, but admitted that power distribution would be the thrust area.

BACK TO PRESENT: In the meanwhile Reliance group had managed to acquire controlling stake in BSES Ltd through the open offer and creeping acquisition route. It has invested in power plants at Hirma in Orrisa, Patalganga in Maharastra, Jamnagar and Ghogha in Gujrat, Jakamkondam in Tamil Nadu and Goa. The group is also eying the Dhabol power plant in Maharashtra.

BSES is a great investment considering the group’s power ambition. It is putting up power projects in Andhra Pradesh and Kerala. It also has exclusive right for electricity distribution in north Mumbai and has also taken over three distribution companies in Orrisa. Not to forget two new distribution company in joint venture with Delhi government for distributing electricity in two-third of Delhi.

But have we seen the group thinking smaller than the length and width of the country ever. BSES is too small considering RIL ambition. It has to be something Pan-India. Secondly, Ambanis take pride in its complex project building capabilities and prefers to "build" rather than "buy". From what we have seen of the Ambanis buying existing capacities/businesses can be part of its strategy but nothing more than that.

Power is the next destination for any Petrochemical, Oil and Gas giant like the Reliance group. But nothing substantial is happening on ground in electricity distribution even when Mr. Anil Ambani had admitted it is the thrust area. Is something happening below the ground?

RIL is building 60000 kms network of optic fibre for its infocom venture. For it, it is laying 12 ducts of different colors and sizes through the length and breadth of the nation at the speed of Reliance. (Ducts are hollow PVC pipes, which you can see being dug into the ground by groups like Reliance. Optic fibre is new generation telecommunication wires which are capable of carrying much more data than the traditional copper wire and is pumped into these ducts later by the suction mechanism)

But why is it laying 12 ducts when others are like MTNL, BSNL, Bharti etc are laying only 2 or 3 ducts?
Reliance group says that it will pump in optic fibre in only half of those as of now and will be keeping the rest for future demand. Does it make sense when experts are already talking about glut of bandwidth? Secondly in such a high technology changing area where people are already coming up with wireless technologies does it make sense to lay ducts keeping in mind the demand 10 years down the line?

Now think of a possibility: -
Reliance group is laying half of these ducts for its infocom initiative and the rest for electricity distribution. In half of these ducts optic fibre would be 'blasted in' by suction mechanism and the other half would be used for electricity distribution by putting electricity distribution cables in the ducts.

Now the question arises is it technically possible? Let us take up the major stumbling blocks:

1. Magnetic Field: High tension electricity distribution cables develop magnetic field around the area from where the cable passes and disturb the transmission of information etc through traditional telephone (read copper) cables. But optic fibre cables works on the technology in which light travels through cables carrying information or data. Secondly, walls of PVC ducts, which take care of magnetic field problem, separate electric cables and optic fiber cables.
2. Insulation: Insulation should not be a big issue. Scientists have developed many insulating materials like rubber, fibre etc which can be quoted around the electricity cables to take care of insulation. In fact PVC ducts itself should take care of insulation.
3. Inserting these electricity cables in the ducts: Optic fibre cables can be inserted in these ducts by the suction mechanism but how do we insert the electricity cables? I am sure technicians can provide us with better way but if nothing else work we can always use what I call "pajama" technology- When we have to insert string in a pajama we first insert a clip which can be easily inserted (in our case optic fibre) and then pull the cloth string (in our case the electricity cables) by tying it to the clip. Same can be done for the electricity cables too.

I believe the major problem is not technical but political. Getting permission for inserting electricity cables in ducts that were originally permitted only for laying optic fibre cables will be hard to come by. All politicians, state electricity board employees, human right organizations will be on road screaming the potential dangers of high-tension wires. Politicians would like the companies to again purchase "right of way" by bribing them. State electricity board and its employees would like to enjoy their monopoly for some more time. And the human rights organizations will get an issue to scream about and watch themselves on television.
Next important question will be; what forced Reliance to keep it a secret rather than boasting it in front of the shareholders? It can be any of the following:

1. Reliance knew it would be difficult getting “right of way’ if it discloses it intention to use it for electricity distribution. It would need lot of clearances from many government departments. Which will eat up valuable time.
2. It is waiting for the government to announce private participation in electricity distribution before which, such plan is of no value.
3. It want to catch it competitors like TATA POWER on the wrong foot and take an early lead.
4. And above all Ambanis don’t want BSES share prices to shoot through the roof as they are planning to increase the stake to 51%

Okay I admit Mr. Mukesh Ambani had not whispered anything like that in my ears. Its possible that they are not planning anything like that. But the question is if it’s technologically possible and Reliance has similar ambitions WHY NOT? Remember after Reliance Declared its Infocomm plans & started laying the ducts BELL LABS OF USA came up with an innovation which makes it possible to carry 20 times data through the same optic fiber cable, by just changing the input and output point. Which means Reliance has bandwidth 20 times then it really wanted.

Imagine what if it comes true. We would experience in the power sector what we are currently experiencing in the telecom sector:
Prices will fall, Monopoly and blackmailing of the state monopolies will be over, quality of services will improve, uninterrupted power supply and no destruction of electricity appliances due to voltage fluctuations. In one word Competition.

If it comes true India will be able to bridge a gap of atleast 10 years in its infrastructure development. The indirect effect of it will have on the efficiency and working of industries etc cannot be imagined. But all this will be possible only when the State governments end the monopolies of the SEBs which will require a strong political will.