BOOM and BUST

 

The sign of a raging bull market was evident with the oversubscription of Reliance power IPO by 69 times. The touted biggest Indian IPO not only made the promoter surpass  Mukesh Ambani but made Anil Ambani the richest Indian. Apparently, little did the investors know that its market cap will get eroded by 94% since IPO  in 2018. This dramatic episode unfolded for a reason.

PRELUDE:

The Reliance group was valued at 15 billion when Shri Dhirubhai Ambani passed away in 2002, This was followed by the split of the giant conglomerate with RIL led by Mukesh Ambani and sunrise industries like financial services, construction, entertainment, power, health care, aviation, and defense industries being led by Ani Ambani, but what went wrong with each company floated by him which cumulatively lost 42 billion in 12 years?

Reliance infrastructure

Infrastructure is greatly influenced by the government's stratagem, governments do impact real estate companies as its policy on infrastructure, credit availability, and various other parameters like timely payment, regulatory, approval, and arbitration matters determine the fortunes of the company.

The capital-intensive industry failed to recover timely dues from the government. To service the mounting debt it had to sell its Mumbai energy business to Adani for 18800 crores despite that, as of 2020 it owed 6000 crores. The company also said that 60000 crores were stuck in arbitration matters for 10 years.

Reliance Power

The government controls all three segments in power: generation, transmission, and distribution. Power being in the concurrent list is controlled by the state as well as the center. Generation is in hands of state and central government which was later joined by private players but distribution and transmission are still with the state government.

Problems with generation 

Availability of coal: As there is a legal restriction to mine coal for commercial purposes it has to be imported. The price of Imported coal is influenced by global demand and dollar fluctuation.

Transportation of coal is again a problem to be solved. India does not have enough ports to handle the demand for coal so more ports are to be built. Within India coal is transported by trains which are again government dependent.

Transmission and distribution

Huge power theft and reluctant government policy to allow accurate pricing led to mounting losses and eventually going bankrupt.

Relaince communication:

As RCOM banked on CDMA technology, it lost to its competitors when 4g came in. CDMA failed to be adaptable for the 4g revolution, adding to the owes debt-ridden reliance company had to borrow even more to stay in the game but capital intensive businesses could not price appropriately due to competition which led to falling revenues.RCOM received its death-blow with the launch of JIO which shook the entire telecom space 

When RCOM insolvency proceedings began in 2018, ERICSSON claimed 1100 crores and the supreme court threatened jail for Anil if dues were not paid which was later cleared by his brother saving him.

Anil Ambani with a personal guarantee had borrowed 680 million from three Chinese banks was subject to personal humiliation when he had to declare in London court that he had no meaningful assets to repay them in 2019. 

RCOM owed 50000 crores to various banks in 2018 and its assets are up for sale for which JIO is reportedly the highest bidder.

Reliance Capital:

Reliance home finance has also incidentally defaulted on bond repayments and has sold reliance capital and has put its general insurance, private equity, and radio business on the block. 

As of August 2020, Anil Ambani group companies owed 20000 crores (believed to be more than 1 lakh crores now) to various banks, RIL despite expanding using debt has been successful because of solid cash flows generated by its petrochemical business but here in AAGP's case, it had no free cash spewing business to repay its debts also debt being in dollars it had to account even for depreciating rupee while paying its interest, with FCCB not able to convert into equity it had to repay the entire debt. so to succinctly put it, reckless growth using debt has been awful to AAGP, so, if the debt is detrimental even for Ambani should we not stay away from it is a question to ponder upon.

References :

https://www.bloombergquint.com/business/reliance-infra-will-be-debt-free-in-fy21-anil-ambani

https://www.thenewsminute.com/article/downfall-anil-ambani-42-billion-net-worth-zero-12-years-117944

https://economictimes.indiatimes.com/news/company/corporate-trends/india-incs-creditworthiness-on-test-investors-fear-disputes-as-fccb-maturity-looms/articleshow/9007349.cms

https://economictimes.indiatimes.com/industry/telecom/reliance-communications-raises-1-8-billion-to-repay-fccb-lenders/articleshow/11532302.cms?from=mdr

https://www.indiatoday.in/magazine/the-big-story/story/20190325-the-fall-of-a-billionaire-1477813-2019-03-15

https://www.moneylife.in/article/nclt-asks-reliance-home-finance-to-repay-dues-to-its-ncd-holders/64384.html

Ordinary Stocks Extra Ordinary Profits by Anand Srinivasan