Has the Bubble Burst? No not yet

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

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

Spectrum dispute: My solution

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.

Anil Ambani the Entertainment Czar

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.

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

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.

Anil Ambani – No lesser God

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.

Reliance Communication's judgement day!!

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.

Anil Ambani in Kolkata!!

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.

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

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.

Why Reliance Communications is applying for GSM spectrum

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

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?

Should Anil sell out of Infocomm??

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.