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Disturbing signal? Reliance 'shifting focus' away from Indian petrochemical sector

Mukesh Ambani
By NS Venkataraman*
Reliance Industries Ltd (RIL), a large Indian company, has expanded and grown in a spectacular manner during the last few decades, like of which no industrial group in India has performed before. RIL is now involved in multi various activities relating to petroleum refineries, petrochemicals, oil and gas exploration, coal bed methane, life sciences, retail business, communication network, (Jio platform) media/entertainment etc. 
While these activities may look unrelated for an observer, Mukesh Ambani , the chief architect of RIL seems to view them as related activities, as all of them have money making potentials.
While large group like Tatas, Birlas, Dalmias have existed in India for several decades and for much longer period than RIL, today these large household names in India look small in size in the eyes of share holders and general public , when compared to that of RIL.
It appears that Mukesh Ambani has gained an image as hard-headed business man with pragmatic approach There is no need to disapprove such ambition of a business man, so long as he carries out his business activities as per the law and pay the taxes.

RIL’s remarkable progress

RIL has made remarkable progress in expanding the chemical and petrochemical business in the last few decades, which are praiseworthy and have received international acclaim.
RIL has one of the world’s largest refinery complex , with the aggregate refinery capacity of 1.24 million bopd (barrels of oil per day).
Refinery and petrochemical units of RIL are globally competitive in terms of size and technology.
RIL has taken several initiatives of far reaching significance in refineries /petrochemical sector such as the move to import ethane from USA for use as feedstock for production of petrochemicals, that would give competitive advantages for RIL in the Indian and global market. Several other technological and business initiatives of RIL relating to refinery /petrochemical sector can be readily pointed out.
Obviously, Mukesh Ambani has moved with confidence with innovative strategies to build the refinery and petrochemical units and no other Indian industrial organization stands on par with RIL in this respect.
Recently, Mukesh Ambani has gone for diversification projects in consumer sector and has exhibited admirable speed and dynamism in such diversification exercise. Mukesh Ambani has certainly set new standards in India for business promotion. There are enough reasons for India to feel proud about RIL and it’s present chief architect. 
Performance of RIL in oil and gas exploration sector
The above figures indicate that the performance of refinery and petrochemical sector in the past have been steady and the trend is likely to continue in the coming years. However, in the oil and gas exploration secto , the performance trend of RIL over the years has not been impressive and are unlikely to improve in the coming years.
The shale gas production in the shale wells in USA belonging to RIL have also not been showing impressive performance over the years. 

Performance of RIL  in oil & gas exploration sector

Even while acknowledging and applauding the extraordinary performance of RIL in refinery and petrochemical sector, not all activities of RIL in different sector have proved successful to the same extent , like it’s achievements in refinery and petrochemical sector. Glaring example is RIL’s Krishna Godavari gas exploration project.
RIL has so far made around ten gas discoveries in Krishna Godavari (KG) basin. Of this, D1 and D3 Gas wells in the KG D6 block. are the largest. The output of D1 and D3 has fallen sharply from 54 million standard cubic metre per day in March 2010 to 1.76 million standard cubic metre per day in April to June 2019 and now in February 2020, it has ceased to produce gas. Several wells have been closed by RIL.
Still, RIL claims that new wells are being developed, which does not give confidence, when seen in the context of the past performance in KG basin.
As a matter of fact, KG gas exploration project became controversial. It has been alleged in the audit reports released by the Auditor General of India and other agencies that when awarding gas contract to RIL, the pre-qualification norms were diluted by the then Government of India to ensure that RIL would get qualified. It has been further alleged that the claimed size of gas discoveries , the field development plans and the investment outlays proposed escaped rirgorous due diligence.
Since the commitment of RIL on gas output was not achieved, the Government of India slapped around 3 billion USD as penalty. RIL blamed the un anticipated sand and water ingress as the reason for shutting down the well. RIL estimates liability of around Rs 3000 crore only in this nine year old dispute with Government of India. The arbitration is now on.

Leaning towards consumer sector

As per the annual report of FY 2018-19, the turnover of RIL was around Rs 6.22 lakh crore.
Of this, the refinery and petrochemical sector contributed around 58% of the revenue . The consumer sector namely retail business and communication network (digital) contributed around 40%, whereas other activities such as oil and gas exploration, media/entertainment contributed just around 2% of the annual turnover.
The share of consumer sector in the turn over has been steadily increasing and is likely to increase further in the coming years , that would bring down the share of refinery and petrochemical sector in the overall revenue of RIL.

Reducing net debt not by greater profit but by equity sale 

Recently, Facebook signed a binding agreement to infuse Rs 436bn in Jio Platform, which will give it a 9.99% stake.
A commercial partnership has also been signed with Facebook-owned WhatsApp, which will further accelerate JioMart – the upcoming O2O offering of Reliance Retail, whereby WhatsApp will be used to provide solution to small merchants and also raise convenience and reach of consumers.
This along with the closure of Rs 70bn stake sale to BP in the oil marketing JV should imply cash infusion of over Rs 500bn.
The progress in stake sale in tower and fibre InvIT as well as to Aramco may be the other triggers.
Now it is reported that the Rights Issue of Rs 53,124 crore of RIL has been over subscribed by nearly 1.6 times.
It appears Mukesh Ambani thinks he can't have free run that he had in  petrochemical business in India as in earlier days
It seems that RIL expects that cash inflow from the Facebook and RIL-BP deal and public issue would bring down net debt to Ebitda from 2.9 in FY 19 to 2.1 in FY 21 and 1.3 in FY 22.
While it is quite a common practice in large companies to reduce debt by bringing in equity sale proceeds , it appears that resorting to equity sale to reduce the debt is a cost benefit decision. In the present situation when equity is “cheap”, perhaps, Mukesh Ambani thought that using the equity sale income to reduce the debt burden is a pragmatic strategy. No one can find fault with this strategy, though it has raised eyebrows in India. 

Losing hope in petrochemical sector? 

It appears Mukesh Ambani thinks that he cannot anymore have a free run that he had in the petrochemical business in India as in the earlier days.
Therefore, to maintain the profitability of the company, he has opted to go for diversification projects in consumer sector , which have high level of relevance to India’s economic growth pattern.
It is obvious that Mukesh Ambani has shifted his focus towards consumer sector such as retail business and communication network and wants to move away from the refinery and petrochemical sector, to the extent feasible for him in the present circumstances.
Many observers say that surplus amount generated in refineries and petrochemical sector in the past have been ploughed in other unrelated sectors such as Jio communication network, retail sale business , media etc.
Many people seem to think that, instead of shifting focus towards consumer sector, Mukesh Ambani should have further expanded his petrochemical business to consolidate the gains achieved by hard and sustained work over the last several decades. He still has lot of opportunities to invest and move on in this core area of refinery and petrochemical, where he has proven expertise and impressive achievements.
Is Mukesh Ambani now lacking in confidence that he can sustain his petroleum refineries and petrochemical business profitably in the same way, as he has done in the past?
It is known that refinery and petrochemical sector suffers from unpredictable changes and can even be termed as cyclical business to some extent. It requires enormous forward planning, insight and high level of capability to readjust the business movement from time to time in tune with the changing trends, to maintain and further boost the profitability of operations. In the past, Mukesh Ambani has been able to reveal such qualities in his management style of refinery and petrochemical sector. Why this changed approach now?
In recent years, several major players in India have been investing in massive capacity build up in refinery and petrochemical sector. Such players include Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation, GAIL, OPAL . ONGC, Nayara Energy (formerly Essar Oil , which has been taken over by large Russian conglomerate) and others.
Further, with the proposed 60 million tonne per annum refinery complex in Maharashtra, planned by HPCL, IOC and BPCL, with proposed equity participation from ADNOC ( Abu Dhabi) and Saudi Aramco (Saudi Arabia), the competitive condition in Indian market may further intensify. The size of the above proposed project in Maharashtra is comparable to the refinery and petrochemical operation of RIL in Jamnagar, Gujarat.
As such competitor companies have been steadily expanding with certain level of dynamism , one suspects that Mukesh Ambani thinks that due to such emerging competitive conditions in India, his near monopoly advantages of the past in the refinery and petrochemical sector have been lost now , for all practical purposes.
Perhaps, Mukesh Ambani is of the view that such changed conditions in refinery and petrochemical sector ( which is a core area of RIL until recently), may impact the profitability and RIL’s debt repaying capability in future.
Obviously, Mukesh Ambani thinks he needs support and help to sustain his petrochemical business and perhaps, this is the reason why he has invited ARAMCO to become an equity partner in the oil to chemical business of RIL.

Why obsession with zero debt company?

In recent times, Mukesh Ambani has repeatedly said that he aims at making RIL to be a zero debt company by 2021.` This statement has surprised many people , who view RIL from distance.
It may be Mukesh Ambani’s view that one way of solving this potential problem of reducing profitability in refinery and petrochemical units is to make RIL a debt free company, by enlarging it’s equity base and encouraging equity investment from overseas players and share holders in emerging and promising areas such as consumer sector. It appears that the retail business and business related to communication network (Jio platform) has taken off well from the point of view of the revenue earned.
Now, what Mukesh Ambani is trying to do is that having developed and enlarged the retail business and Jio platform, he is offering the equity in these companies to international organizations and private equity firms such as KKR, who are impressed with the business prospects in India for these consumer sector. 
By selling these equity share in these companies, Mukesh Ambani is hoping to take the investment from these companies to repay the debt of RIL and thus making RIL as debt free company.
In other words, probably, Mukesh Ambani thinks that to ensure the profitability of RIL in the same way that he had in the past , he has to necessarily sell the equity in diversified retail business and Jio platform as well as in refinery and petrochemical sector ( proposed 20% equity sale to Aramco) to make RIL to become a debt free company to avoid any uncertainties in the future finances of the company and consequent possible problem in servicing the debt.
This view of Mukesh Ambani wanting to move away from refinery and petrochemical sector is reinforced by the fact that he has offered to sell 20% equity in oil to chemical business to Aramco.

What future for RIL?

For all practical purposes, it is clear that Mukesh Ambani is diluting his effective leadership in RIL by selling equity share to overseas companies.
Some pledged admirers would call Mukesh Ambani’s move as legitimate and pragmatic exercise to safeguard the future interests of RIL. They would argue that it is international practice for large companies to change the equity pattern from time to time depending on the developments and mergers and acquisitions between companies need not be viewed as negative indicators of the fortunes.
At the same time, critics argue that Mukesh Ambani is shifting his focus away from his refinery & petrochemical sector (cash cow) is a panicky move and shows a sort of weakness in his futuristic outlook.
All said and done, diversification moves of Mukesh Ambani into retail business and Jio platform may prove successful from the point of view of revenue and profit and time alone will indicate the extent of success. At present, the fingers have to be kept crossed about future fortunes of retail business and Jio platform, which may also face uncertain conditions due to any change in government policies, emerging competitiveness and other unforeseen fluctuating conditions.
While one cannot say at this stage conclusively whether Mukesh Ambani’s moves will be proved to be right or wrong, all one can say is that Indian refinery and petrochemical sector will not be the same again after RIL, in all probability may dilute the focus in refinery and petrochemical sector in view of it’s focus on consumer sector namely retail business and Jio platform.

Will Indian chemical sector be a loser?

Overall, Indian refinery and petrochemical sector may be a loser, in the event of Mukesh Ambani focusing less on refinery and petrochemical sector. In such case, certainly India would crave for one more Mukesh Ambani with similar dynamism to take the Indian refinery and petrochemical sector to it’s rightful place in the global sphere.
Even as the Prime Minister is speaking repeatedly about the need to strengthen the manufacturing base in the country, one of the most important companies in India namely RIL leaning towards consumer sector ,should be a matter of concern for the entire country.
So far, RIL has been a trend setter in the refinery and petrochemical sector in India and decision of Mukesh Ambani to focus elsewhere may be viewed as a disturbing signal for Indian chemical and petrochemical industry.
---
*Director, Nandini Consultancy Centre, Chennai. Website: www.nandinichemical.com

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