Mukesh Ambani’s Demerger Plans For RIL Businesses May Reverse Dhirubhai Strategy Of Consolidation 

Life is about to turn full circle for Reliance Industries Limited (RIL). Under the late Dhirubhai Ambani, the strategy was to float new ventures to raise capital from the public, and then folding them back into the mother ship to consolidate resources and market value in a multi-business operating company. RIL now has oil exploration and gas, petroleum refining, petrochemicals, textiles, retail and telecom under one company. It won’t remain so by the early part of the next decade.

Under Mukesh Ambani, we might well see a gradual reversing of Dhirubhai’s single-company conglomerate strategy, with the underlying business units being gradually spun off into operating subsidiaries. The only thing to speculate about is whether the mother ship will ultimately become a non-operating holding company, or remain hybrid – a holding company with one or two operating businesses under it.

The process of demerging businesses began more than four years ago, with the first major business Dhirubhai was associated with – the Vimal brand and the related textiles business – being sold 49 per cent to Chinese textiles major Ruyi in December 2014.

Reliance then went in for massive investment in two major consumer-facing forays, Reliance Retail and Reliance Jio. In the process, it has taken on massive loads of debt. From a zero-debt company just a few years ago, Reliance reported Rs 274,381 crore of debt in the December 2018 quarter. Net of cash and related balances of Rs 77,933 crore, the net debt position was Rs 196,448 crore. At a rupee-dollar exchange rate of around Rs 70, that works out to $28 billion. Excluding the cash assets, the gross debt in over $39 billion.

While the Dhirubhai strategy of holding diverse businesses under one roof helped Mukesh use cash flows from the refining and petrochem businesses to fund cash-guzzling retail and telecom, future value-creation depends on Mukesh Ambani now doing the opposite.

Given the rise in net debt, and also to encash the value already created by a massive investment binge over the last few years, the time appears to be right to begin the process of demerging key businesses.

In January this year, plans were announced for the demerger of Reliance Jio’s tower and fibre assets along with Rs 65,000 crore of related debt. This will straightaway reduce gross debt by $ 9 billion when – and if – it happens.

Today’s newspapers (17 April) report that Reliance may be about to demerge its flagship refining and petrochemicals business by offering Saudi Aramco a 25 per cent stake. Since the overall business is valued at $ 55-60 billion, a 25 per cent stake sale means an inflow of upto $15 billion in the mother ship. Enough to cut down overall net debt by half in one shot.

Moves are also afoot to list Reliance Retail Limited through an initial public offering later this year. In the 2017-18 financial year, the retail business, the largest in the country, had around $10 billion in revenues (Rs 69,158 crore). The most valuable listed company in the retail business is Avenue Supermarts (D Mart), which has a market value of Rs 88,000 crore. But Reliance Retail, with twice its revenues, should command higher valuations. Even at the same valuation, if Reliance Retail offloads 25 per cent through an IPO, it could raise over Rs 40,000 crore. Enough cash to bankroll an entry into cash-depletive e-tailing, where the competition includes the likes of Amazon and Walmart (through Flipkart).

Next, of course, will be the biggest IPO of them all: Reliance Jio, the company with the biggest potential for value creation as the telecom data boom gathers steam. In a three-player scenario, tariffs will rise once Jio decides to stop the price wars, making it hugely profitable. Analysts believe that an IPO in Jio is at least two to three years away, but whenever that happens, it is likely to make almost all of Reliance and Jio’s overall debts disappear.

The journey from a zero-debt company at the start of the decade to a high-debt company now, and a return back to the zero-debt stage by the first half of the next decade marks a tremendous success journey for the Ambanis, if all things work out.

In the process, a conglomerate which housed all its unconnected businesses in one company will have floated off separate businesses into discrete companies that will be easier to understand for analysts. It will be the exact opposite of what founder Dhirubhai Ambani set out to do. Mukesh Ambani will realise tremendous value for himself and his shareholders in the process.

And Reliance Industries could change character from a fully operational company to one that is only partially operational or even a holding company with majority or significant stakes in various separate businesses.