Archive for May, 2010

ADAG Feels the Heat as TPC plans to go to Court

Thursday, May 13th, 2010

The Tata Power Company’s (TPC) decision not to pay heed to the Maharshtra government’s diktat to sell power to RInfra has exposed the state’s lackadaisical approach to the power sector. The state was seen forcing TPC to share its electricity under the garb of ‘consumers’ interest’ even as consumers of the state-owned power entity are facing huge power shortages.

A section of the government officials believe that the state government should not have got involved in a war between two corporate houses. “We (the government) have no reason to meddle especially after the issue was first addressed by Maharashtra Electricity Regulatory Commission (MERC) and then by the Supreme Court. The state’s intervention was uncalled for,” admitted a senior government official. According to this official, the state government ignored dissenting voices on the issue.

As has been reported, the Supreme Court last year upheld the TPC’s contention not to supply electricity to RInfra in the absence of a formal power purchase agreement between the two. The TPC had set April 30 deadline for RInfra to sign a PPA. When the deadline passed with no agreement, RInfra sought the government’s intervention. RInfra claimed that it would be forced to raise tariff if TPC discontinued power supply. The state, fearing the tariff hike may create a “law and order problem”, first directed the TPC to maintain the status quo and later appointed a committee to find a solution.

Experts point out that when the state government decided to step in, it didn’t even try to look fair. “When the government was seen trying to resolve the issue, it should have adopted a balanced approach,” a senior official from the state power utility said. “If the government was keen on playing an adjudicator, it should have asked RInfra to sign a power purchase agreement (PPA) with TPC while insisting the latter to keep the supply on,” this official felt.

Watch it on Youtube: Tata Power, Reliance Infra faceoff

BP Backs India Court Ruling In Reliance Case

Wednesday, May 12th, 2010

BP PLC (BP, BP.LN) said Monday it supported a decision by India’s highest court in a case involving Reliance Industries to give precedence to government production sharing contracts over other agreements.

India’s Supreme Court last week ruled that Reliance Industries Ltd. (500325.BY) doesn’t have to abide by the terms of a family agreement when supplying natural gas to Reliance Natural Resources Ltd. (532709.BY).
It said a government production sharing contract should take precedence, meaning that Reliance Industries can sell gas to Reliance Natural Resources at a government-set price, rather than at the much lower rate set in a 2005 agreement between the two companies.

Reliance Industries is controlled by billionaire Mukesh Ambani, while Reliance Natural Resources is run by his brother, Anil.

“We understand that the Supreme Court verdict has upheld the sanctity of the production sharing contract. BP strongly supports the notion of the sanctity of contracts-long term stability and regulation-in order to encourage companies to make investment decisions,” a BP spokesman told Dow Jones Newswires.

By underlining its support for government production sharing contracts, the ruling has cleared up uncertainties surrounding such contracts and removed a major concern for international investors, analysts said.
The Ambani feud affected India’s last auction of oil and gas exploration blocks in October, as major global companies steered clear because of worries about the clarity of government contracts, as well as weak global demand.

In a previous auction, BP had signed a production sharing contract in a consortium with Reliance Industries for a deep water exploration block.

Source: Wall Street Journal

Reliance & Ambani Brothers – Past, Present & Future…

Tuesday, May 11th, 2010

When two children are fighting on the same piece of chocolate, how would a mother play a mediating role between them?

Either she will buy a new chocolate for the other child or just divide that sole piece of chocolate into two equal parts to be distributed between both the children. What did Kokilaben do in case of feuding Ambani brothers? Read on…

Equal Distribution of Reliance Group’s Worth

When it came to feuding Ambani brothers, Kokilaben had no other option but to move forward with the latter case scenario of dividing equally the fortunes of the humungous empire of the Reliance Group which was built under the leadership of late Dhirubhai Ambani.

In June 2005, Mukesh and Anil Ambani signed a MoU to reorganize Reliance Industries, in order to take over reins of different assets and businesses of the group under their individual domain.

The most significant aspect of the MoU was that RIL promised to supply 28 million cubic meters of gas for 17 years at $2.34 mmBtu to Anil Ambani’s RNRL. However, the MoU came under dispute subsequently in 2007 on government setting up a price of $4.20 mmBtu for gas contracts in the KG Basin fields.

The core business of the group in the form of energy and petrochemical business was pocketed by Mukesh Ambani, while the junior Ambani inherited Energy, Financial services in form NBFC business and a newly developed but fast emerging Telecom business of the Reliance Group.

At this point in time, during the process of de-merger, the fortunes of the group were distributed equally between the two estranged brothers.

Anil Excelled in Finance & Mukesh went for Petrochemicals

Anil who had finance-related acumen was more than content while inheriting business of Reliance Capital, apart from group subsidiaries such as Reliance Infrastructure (Power business), Reliance Communications (Telecom business) and not to mention RNRL – somewhat a shell company with interests in marketing of natural gas.

On the other hand, Senior Ambani was happy with the group’s core business of Petrochemicals where Mukesh excelled in terms of technical know-how and interests.

Ambani Brothers Explore New Fields of Business

However, as time passed, both the brothers made efforts to expand and diversify their businesses post de-merger. Anil Ambani had dreams to construct a mega Rs.28000 crore power project at Dadri powered by a cleaner fuel in form of gas, in contrast to coal fuelled projects under the portfolio of Reliance Power.

On the other hand, Anil also diversified with mega-infrastructure projects including metro rail projects under the portfolio of Reliance Infrastructure. The Junior Ambani also became active in the space of Media and Entertainment by acquiring Ad-labs Films Ltd.

However, Senior Ambani moved along the lines of his traditional strength of Petrochemicals business. He came up with a new company in the form of Reliance Petroleum (RPL) and created the world’s most envied Petroleum Refinery in Jamnagar. Later, this company was merged with the parent company Reliance Industries.

Mukesh also came up with subsidiary involved in new-age concept of Retailing under Reliance Retail, Reliance Trends, Reliance Jems & Jewels and Reliance Digital.

At the time of de-merger, both the brothers departed amicably with equal distribution of the Group’s fortunes between the estranged brothers. From here, it remained on both the brothers as to how they expand their individual empires along with the crucial support of their shareholders and other stake holders.

Even as both the brothers started off as equals, their groups under the leadership of individual Ambani brothers have moved forward in their respective line of businesses but in different directions of claiming fortunes.

Recession – A Jolt for Anil Ambani’s Fortunes?

Mukesh has been growing in strength by every passing year, while Anil Ambani has lagged quite a bit over the last 5 years. Mukesh’s wealth has surged to roughly around $29 billion even as Anil’s fortunes are stuck at $14 billion, a whooping half that of his senior brother’s standing.

In fact, before the global recession was witnessed a couple of years back, the difference in fortunes of the feuding brothers stood around $10 billion.

Since then, the market capitalization of Anil Ambani’s Reliance Capital and Reliance Communications has taken a severe beating, even after the current sharp recovery in the Indian benchmark indices. This has widened the gap in the fortunes of both the brothers from $10 billion during pre-recessionary period to $15 billion post-recovery.

Let us have a look at how the individual companies of Junior Ambani’s ADAG group have performed over the last few years:

Reliance Communications

The business under Reliance Communications which was seen as fast emerging telecom business before the de-merger – fared poorly over the last couple of years speaking in line with relative performance in terms of market capitalization of the company on the Indian bourses.

The telecom industry remains completely bogged down by the intense price wars and over-crowded capacity of the sector. The company was also alleged by DoT for misallocation of revenues in its accounting practices.

The stock price of the company is way below the peaks levels of around Rs.800 witnessed during the peak of the previous Bull Run, currently at depressed Rs.150 levels.

Reliance Capital

The business under Reliance Capital has somewhat been the star performer for the Anil Ambani’s group. The company’s insurance business has been one of the fastest growing companies under private insurance space. The premium from the insurance business has surged more than five times over the last 3 years.

On the other hand, Reliance MF is still a leader with nearly Rs.1 lakh crore in assets under management. Reliance Growth scheme of the group still remains one of the most admired mid-cap funds among the retail investors.

More recently, RBI has allowed entry of new players for granting of banking licenses to private sector entities and NBFCs to enter into the commercial banking space. Reliance Capital could be one of the key beneficiaries of this new announcement as it intends to tap pan-India banking business.

However, the stock price of Reliance Capital has remained depressingly low around Rs.700, as against the peak level of around Rs.2500 witnessed during the previous bull phase. This depressing market capitalization levels has exerted pressure on the valuation of the company from pre-crisis levels.

Reliance Infrastructure

At the peak of the previous bull run, Reliance Infrastructure (REL) had come out with the IPO of its power related subsidiary Reliance Power, which saw a huge rush of retail investors to grab on the future power story of the Reliance group.

However, what followed later is no secret to anybody reading this article. The crash in the stock price of Reliance Power has halved the valuation and market capitalization levels of both Reliance Power and REL, in the process disappointing investors with unprecedented losses in IPO of Reliance Power.

After transferring the power related business into its subsidiary Reliance Power, REL shifted its attention and involvement into major infrastructure projects including mega metro rail projects.

The market capitalization of REL is way off from its peak levels of around Rs. 2200 witnessed during the frenzy of Reliance Power IPO.

Reliance Natural Resources & Reliance Power

I’ve taken the analysis of both these companies together as their fortunes are somewhat linked with each other.

Reliance Power has plans to built 35000 mega watt of green-field power generation projects. Anil Ambani has planned the biggest power project of all at Dadri, with expectation of supply of gas through RNRL, originally sourced from RIL, at $2.34 mmBtu as per the MoU signed in 2005.

However, in its recent verdict the apex court has directed that the private MoU signed between the feuding Ambani brothers cannot be upheld against the PSC agreement signed with the government, the owner of the gas.

This verdict has come as a big jolt to the junior Ambani camp whose costs for their ambitious power project could escalate dramatically to $4.20 mmBtu as per the price fixed by the EGoM.

Specifically speaking about RNRL, if the case would have been gone their way, it could have translated into a profit of Rs.3000 crore a year for this gas company. However, the negative verdict renders this company into a near shell company with some coal based methane blocks under its portfolio.

To conclude, post de-merger and to some extent even recently witnessed global crisis, the valuations of all the ADAG group companies have been a laggard in terms of market valuations and even performance wise.

On the other hand, the performance of Mukesh’s RIL has remained stable and sound all this while except that the company’s Gross Refining Margins (GRM) took a small hit on account of recessionary impact of fall in demand of crude oil. However, the demand and GRM are likely to scale higher gradually, as optimism returns in the global markets.

Will Anil Ambani’s ADAG Group of companies recover any time soon?


Highlights of the RIL-RNRL verdict

Friday, May 7th, 2010


• The Indian Supreme Court just released its long awaited verdict on the gas price dispute between Reliance Industries (RIL) and RNRL, ruling by 2 to 1 in favor of RIL. It was ruled that the government PSC takes precedent over all other agreements as RIL does not have absolute rights over the gas.

• As such, the original MOU signed between the Ambani brothers in 2005, in which RIL agreed to sell gas from the D6 field to RNRL at price of $2.34/mmbtu was agreed, was deemed non-legally binding as the MOU was not made public and no government approval was obtained on the agreed gas price of $2.34.

• The verdict did not however conclude what price RIL should sell the Dhirubhai gas to RNRL. Instead the court has given a period of 6-8 weeks for RIL and RNRL to renegotiate new contract terms. The agreed gas price will then have to be approved by the Indian government as the resource owner.

• Expectation- the final gas price will be as per the Indian government’s Gas Utilization Policy established in 2008, in which the gas price was fixed at $4.20/mmbtu for 5 years. While the ruling is positive for RIL in the short term, it is clear that gas prices will remain regulated by the Indian government in the long term.


India’s Supreme Court ruled today by a margin of 2:1 in favor of Reliance Industries in the long running gas pricing dispute with RNRL. The key points from the ruling are that the PSC takes precedent over the MOU and that the government has the right to decide the price of gas under PSC contracts. While the parties have 6 to 8 weeks to agree contract terms (including the price) of gas supply, we do not expect RNRL or RIL will have much scope for negotiation. Fundamentally, RNRL must effectively abide the terms under the gas pricing utilization policy which stipulates a price at the beach of $4.20/mmbtu fixed for 5 years. If the parties fail to agree, the government will mandate the official price or RNRL will lose supply rights. In the short term this is clearly a positive for RIL and its partner Niko in the D6 block. In the longer term the key point is that the government will become the de facto regulator of both onshore and offshore gas prices.