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

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!!

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

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

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.

Mukesh Ambani reads I Mag

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!!