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India's Reliance


In mid-May, the Indian government did something unusual. It decided to reverse a policy that would have helped one of the nation's most formidable business empires. It's a curious tale. Early in the year, New Delhi had announced that, for a nominal fee, fixed-line telephone operators would be allowed to offer limited mobile services without actually buying a mobile license. To foreign and local telecom outfits that had spent billions on such licenses, the announcement was a bolt from the blue.

Industry execs soon figured out that the biggest beneficiary of the new policy would be Reliance Industries Ltd., a Bombay-based, $12.9 billion conglomerate with considerable political leverage. Time and again over the years, successive Indian governments have altered regulations in industries that Reliance has subsequently dominated. If the January telecom rule had prevailed, the group could have undercut its rivals on price, a key advantage in a business in which Reliance is only a peripheral player.

The government's new telecom policy quickly attracted attention. In April, newsmagazine India Today called it a "telescam," while the Cellular Operators Association of India, to which Reliance belongs, referred to "vested interests." Eventually, citing the need for a level playing field, New Delhi reversed course, essentially reverting to the status quo. Reliance denies it exerted improper pressure on regulators and insists the rule change was meant to benefit the entire telecom sector and consumers. It vows to forge ahead anyway with its plans to offer cheap mobile service.

Still, the government's reversal must have been a wake-up call for a group that has been getting its way since a textile trader named Dhirubhai H. Ambani founded it in 1966. Over the years, Ambani and his U.S.-trained sons, Anil, 42, and Mukesh, 44, have shrewdly sold themselves to sympathetic officials as defenders of the Indian consumer--a gambit that has paid off handsomely. In the early 1990s, Reliance told New Delhi that the group could help reduce the amount of money the nation spends each year on refined oil imports if it built its own refinery. The government provided Reliance with a number of incentives to build one in 1993--and India's oil purchases of foreign supplies did indeed decline. In its telecom bid, Reliance promised to offer wireless calls for less than a quarter of the going rate--an undeniably good deal for Indian customers.

The Ambanis have come in for a fair amount of criticism, however. Their close ties with officialdom rankle rivals--though there is a long tradition of such relationships in India. Besides, insists the group's joint managing director, Anil Ambani, Reliance is a model corporate citizen. "Political linkages and controversy," he told BusinessWeek in March, "are all in the past. There is no substitute for performance." (Reliance subsequently declined to cooperate for this story.) Still, the Ambanis' putative power to shape a nation's destiny has taken on almost mythic dimensions. When Reliance goes head to head with another company, the rival is almost invariably vanquished. "The whole country is scared of Reliance," says Mahesh Jetmalani, a lawyer and veteran of many legal battles with Reliance.

Yet the Ambanis also get high marks for their entrepreneurial grit and savvy use of capital markets. Nobody has built a major company in India as quickly as this family. In less than 40 years, Reliance has grown so big that its production of petroleum products and petrochemicals accounts for 3% of India's gross domestic product. The group is consistently profitable; last year, it earned $900 million on revenues of $12.9 billion, up 10% over 1999.

Reliance's ability to raise money is legendary. A favorite of both Indian and overseas investors, it has long treated outside shareholders well, unlike many listed Asian companies that favor privileged insiders. Reliance's creditors also applaud its fiscal management. During construction of its $3.4 billion refinery, Reliance's debt never went above 3.5 times its cash flow--a sign of the group's prudence, says Jason Carley, head of fixed-income research for Merrill Lynch & Co. in Hong Kong.

But can Reliance take on foreign rivals? Like India itself, the conglomerate is gradually opening up to the rest of the globe. Having achieved world-class operations, the Ambanis yearn for international respect. They would like, for instance, to offer Reliance shares on the New York Stock Exchange. They want the name Reliance to rank up there with DuPont (DD) or Royal Dutch/Shell Group (RD). If Reliance reaches such an exalted level, the Ambanis' success, in a way, will be India's: It will prove that the nation's economy is sufficiently mature to produce best-in-class manufacturers.

But it's not clear that Reliance knows how to compete against the world's best companies. It operates in a transitional India, where tariffs as high as 41% still protect some of its operations and tax breaks go straight to the bottom line. Many of its rivals are inefficient state companies. And unlike Korean or Japanese conglomerates, Reliance has never pursued a global strategy. Its main market is its home market.

FACING A TEST. Meanwhile, India, thirsty for foreign investment, is lowering its tariffs in such areas as petrochemicals and polyester--Reliance's turf--and inviting more foreign companies to participate. As policymakers wrestle with the thorny problem of loosening state protections, Reliance faces a huge test with its foray into telecom. Assuming the government doesn't reverse itself again, Reliance will have to compete on equal terms in a notoriously ferocious industry with such globally competitive players as AT&T (T), Hutchison Whampoa (HUWHY), and Singapore Telecommunication, as well as aggressive Indian companies such as Bharti Telecom and BPL. "It's a high-stakes business," says Varun Bery, managing director of Hong Kong-based private equity fund Telecom Venture Group. "Reliance has yet to demonstrate an adequate track record in businesses with a consumer interface."

Reliance faces pressure on various other fronts, too. Profit growth in its petrochemical business slowed last quarter amid slackening demand and expectations of a supply glut. In April, a member of parliament produced a 1,600-page report alleging wrongdoing on the part of the Ambani family (see related story, "Reliance's Smoking Gun"). And an ex-Reliance exec named Kirti Shah Ambani (not related to the founding family) awaits trial for allegedly masterminding the attempted 1989 contract killing of Nusli Wadia, chairman of rival textile company Bombay Dyeing. The accused denies the charges, and Reliance declines to comment on the case.

In a sign that all may not be well, the group's share price has softened in recent weeks. And in May, Reliance postponed a listing of its subsidiary Reliance Petroleum Ltd. on the NYSE, saying it would instead divest 14% of its stake in the oil producer for $750 million on the Luxembourg exchange. Analysts note that the latter bourse is far less stringent than the NYSE. "Reliance has always benchmarked itself globally," says R. Ravimohan, managing director of rating agency Credit Rating Information Services of India, which rates Reliance Industries as AAA. "But the real risk lies going forward--when it comes face-to-face with competition."

A few years ago, Reliance seemed untouchable--thanks mostly to its canny founder. As a teacher's son growing up in western Gujarat state, Dhirubhai Ambani burned to take on India's industrial dynasties, which had carved out monopolies with licenses bestowed on them by a socialist government. In 1966, Ambani opened a modest textile factory in Gujarat. It wasn't an easy climate for an entrepreneur with few political connections. To succeed, Ambani knew he needed to cultivate the license-issuing wallahs in New Delhi. So he began courting the elites, inviting them to family weddings, hiring bureaucrats after they retired, and contributing to political campaigns.

TURNING POINT. In the early days, Ambani lacked sufficient clout to extract the cheap government loans being doled out to better-connected businessmen. So in October, 1977, he issued 2.8 million shares in Reliance Textile Industries, raising $1.8 million--one of the larger public issues in India at the time. It was a turning point. Realizing that stock placements were the key to expansion, Ambani made sure investors were well rewarded. And he still does: Over the last five years, Reliance investors have earned an average annual return of 27.45%. "At a time when other Indian companies were taking money from banks or ripping off shareholders," says Ajay Sondhi, country head for UBS Warburg Dillon Read in Bombay, "Dhirubhai Ambani figured out that if he made shareholders happy, they'd give him more money."

By the 1990s, Reliance dominated the polyester and plastics industries and was poised to enter the oil-refining business. Once again, the group demonstrated an ability to efficiently manage large, complex projects. Completed in just three years, the Reliance refinery now processes more than half a million barrels of crude a day and has grabbed a quarter of the domestic market.

Ambani senior, 69, and his sons are a formidable troika. The father remains the controlling patriarch and resident genius. He visits the office a few hours a day and focuses on long-term plans. His sons execute them. Stanford University-educated Mukesh is the quiet, clever strategist; even rivals say he is a "world-class" businessman. Flamboyant, Wharton-educated Anil, married to an Indian movie star, is the group's public face. The brothers are often spied after midnight toiling in their office in Nariman Point, Bombay's financial district, not far from their palatial home.

HARD GOING. Today, much of their time is consumed with telecom. Reliance is spending $5 billion to build a 60,000-kilometer fiber-optic backbone through 115 cities in India and hopes to dominate domestic and global data and voice traffic. "We want to be a carrier's carrier," Anil says. He dismisses the recent controversy: "How can you contest the idea [that] a phone call will cost 75% less for ordinary Indians?"

Analysts say Reliance will find the telecom business hard going. For starters, its 1 cents-a-call plan won't pay without government subsidies or artificially high long-distance rates. Other telecom players won't agree to that without demanding similar advantages. More important, says Faizal Syed, managing director at AIDEC Management Co., a $400 million Singapore equity fund, Indians may not want to pay for such services as broadband and Internet data. "Reliance will be laying very fancy equipment," says Syed. "Will Indians pay for it?"

Reliance's corporate finance chief, Amitabh Jhunjhunwala, insists the company has done its homework and will be pulling in an estimated $5 billion a year in revenues by decade's end in the Indian telecom market. Moreover, once state-owned phone companies are put on the block, Reliance is ready to pounce on their networks and customers. As for Reliance's rivals, Jhunjhunwala is dismissive: "Nobody wants their monopolies to go away. I say: `Grow up, guys."'

Typical Reliance brashness, perhaps, but the company has staying power. It generates $1.4 billion in cash a year, which it's willing to spend to learn the business. "The opportunity in India is huge, and Reliance should be one of the leading players, given its strong finances and execution ability," says Sanjeev Prasad of Kotak Securities in Bombay.

Foreign rivals in cellular, though, have been serving the Indian market since 1995, know it intimately, and already have 3.8 million customers. In addition, players such as Hutchison and AT&T have the expertise and deep pockets to sustain a fight. Despite the bout between Reliance and existing players, in May, SingTel and venture fund Warburg Pincus promised an additional investment of $600 million to SingTel's local partner, Bharti. "I am unfazed by all this," says one foreign telecom exec. "Reliance will have to snatch customers from us every single day." Existing cellular operators are lobbying to provide long-distance service for 21 cents a minute--a third of the going rate--by interconnecting with one another instead of the state operator.

Reliance's upcoming battles aren't just in telecom. While Anil Ambani insists the earnings dip in its petrochemical business is cyclical, tariff barriers are expected to fall in the next three years as India gets in sync with the World Trade Organization. And Asia will soon have a glut of refining and polyester capacity as Exxon Mobil Corp. and others build facilities in Asia and the Middle East. Moreover, Reliance's plan to open gas stations will pit it against the oil majors, which have been eyeing India for years.

It's testing time for Reliance. The giant started as the iconoclast of India's socialist economy, an upstart that mastered the system to break the back of India's industrial empires. Now, as India joins the global economy, Reliance wants to be there, too. To succeed, it will have to adopt new strategies. If Reliance pulls it off, the Ambanis may at last reap the one thing that has eluded them: universal respect. By Manjeet Kripalani in Bombay


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