Here is our interpretation of what Mukesh Ambani said and did not say the annual general meeting today
For starters, Mukesh Ambani talked of all the key business areas that Reliance Industries (RIL) is into. But a year ago, RIL and hedge fund company DE Shaw had entered into a joint venture (JV), to form a financial powerhouse. It talked about entering the retail finance business-to our great surprise-because DE Shaw is a hedge fund relying on quantitative techniques. It has nothing to do with retail financial services. The JV seems to have stalled and there is no concrete news on what final form or structure the JV would take. The JV was supposed to mesh DE Shaw group's investment and technology expertise with RIL operational knowledge and extensive presence across India to offer a comprehensive array of financial services. At the time of the announcement, Anil Chawla, managing director and head of the DE Shaw group's private equity activities in India said that the joint venture will draw upon the core competencies of both firms to develop a platform that can serve the growing needs of Indian companies and individuals. Has the project been shelved for good?
Broadband: Reliance Industries, through another company called Infotel Broadband, had planned to roll out broadband wireless access (BWA) services. It had aggressively bid for all 22 circles during the BWA spectrum auction, for which it will have to pay up to a whopping Rs12,847.71 crore. Its grand ambition was to displace the current internet infrastructure entirely. BWA is a new technology with bandwidths greater than 1 mega hertz and supporting data rates greater than about 1.5 Mega bit per second. However, there is no mention of how the rollout will take shape or the estimate timeframe when it would be rolled out.
Buyback backfired: According to Mukesh Ambani, the share buyback program "represents highly accretive use of cash by the company." Reliance Industries, to date, bought back 2.7 crore shares at a cost of Rs1,929 crore. This is nothing compared to the ambitious buyback program it announced where it would acquire Rs10,440 crore worth of shares till January 2013. Hardly one-fifth of the target amount has been spent so far. And this isn't the first time it has announced a buyback. Moneylife had written about it previously and the same can be accessed here: Reliance share buyback: What the market remembers
Unfortunately, the buyback has not been able to change the severe under-performance of RIL over the last three years.
When will the gas really flow? One of the most important questions regarding our energy security is gas availability, especially from the Krishna-Godavari Basin. Mukesh Ambani said, "We have experienced some disappointment with the reserves and consequently seen production drop below the originally estimated quantities." However, he hasn't said anything about when the gas will finally be produced in adequate volumes from this fertile block. He further added, "We are well on the way to creating a pipeline of projects for our next wave of oil and gas development projects which would include R series discoveries and all the satellite discoveries. Subject to receiving the requisite approvals, we hope to add around 30 (million metric standard cubic metres per day (mmscmd) of additional production through the new wave of planned developments."
When will Reliance Retail be profitable? The retail sector is a highly capital-intensive industry and Reliance has splurged a lot of money in trying to make this vertical work. Mukesh Ambani mentioned a lot of statistics to please shareholders but made no mention of the most important metric to investors-profitability. He said, "Reliance Retail has achieved revenues of over Rs7,600 crore. We wish to position Reliance Retail as India's favourite retailer and undisputed market leader with focused business interests. We are investing aggressively in this business to consolidate and strengthen our leadership position in this sector. We are targeting a growth of five to six times in existing revenues and achieve Rs40,000 to Rs50,000 crore over the next three to four years." This sounds extremely ambitious. More importantly, what would be the figure of loss in order to achieve this kind of topline?
And how long will the gains last under the influence of these four short-term factors?
From a level of 15,749 the Sensex has rallied to 16,681 over the last few four days. Just last week, the markets were in a crash mode. Has anything changed suddenly in fundamental terms? If yes, what is it? If not, what is the likely path the market will take?
There have been several developments over the last two days that has caused this massive rally. The first is speculative burst caused by risk-on mood of global investors. In a risk-on situation—emerging markets, precious metals (risk assets)—suddenly see a gush of speculative money from the large pool of global capital. What signifies that the risk-on trade is getting switched on? This signal is something rarely talked about in India—the strength of Australian dollar. If the Australian dollar strengthens, risk assets rise. If the Aussie falls, risk assets fall in tandem. That at least has been the correlation so far. The Aussie has just completed a long decline that started in mid-April and has turned up sharply. Simultaneously, Australia has cut interest rates and its GDP growth has grown at a scorching pace, adding fuel to fire. This is first and real reason for the lift the Indian equities got on Wednesday. Of course, it is not necessary that this correlation will continue. Indeed inter-market correlations like these have a habit of breaking down just when you think it is axiomatic.
What powered the bulls further was at last some action from the government on the ‘reforms’. There are talks again that foreign investment in multi-brand retail and aviation would be allowed (Vijay Mallya needs a new source of money) and the PM himself called a meeting to clear stalled infrastructure projects. All this has emboldened the bulls (like it has many times in the past) that it can only get better from now on.
Finally, the switch has been flipped all over the world that the US Federal Reserve and Erocrats will do “all that is possible” to prevent a breakup of Euro and supply the world with enough of liquidity to keep the asset prices up. Today, Ben Bernanke, the US Fed chief is supposed to be addressing the Congressional Joint Economic Committee where he is supposed to hint at more “monetary accommodation.”
In short, a short-term virtuous cycle has kicked in: Risk-on mood, lower dollar, promise of reforms and global liquidity. All this has combined to electrify the equity markets. Notice that the commodity markets are rather subdued and that is an important indicator. Neither more monetary accommodation nor talk of reforms will mean much to the course of corporate earnings. Also, it is unlikely that the PM can do much to boost infrastructure investment. He simply is not the man to cut across ministries and states to get things done. Put it another way, at around 17,000+ the Sensex would start to look overvalued. It would need more of the same hopes to stay up, or a significant new set of hopes.
While the Prime Minister targets to invest Rs2 lakh crore in the core sector, will the bottlenecks on the ground suddenly go away under the diktat of a weak PM?
After suffering from a "policy paralysis" for several years, prime minister Dr Manmohan Singh has set a very ambitious investment target of Rs2 lakh crore for infrastructure projects in current fiscal."Infrastructure needs over $1 trillion in the next five years. The government alone cannot invest this amount. Therefore, importance is being given to public-private partnership (PPP). Achieving targets in key infrastructure sectors is the key to success and will inspire confidence about the overall economic growth rate," he said.
For the ports sector, a target of Rs35,000 crore investment has been set for 2012-13, up from Rs16,585 crore in the last fiscal. A target of Rs8,798 crore has been set for aviation sector through the PPP mode for 2012-13, an increase from Rs4,877 crore last fiscal. Referring to the civil aviation sector, Dr Singh said work will be awarded on three greenfield airports-at Navi Mumbai, Goa and Kannur and new international airports at Lucknow, Varanasi, Coimbatore, Trichy and Gaya. Also, two new airline hubs will be created at Delhi and Chennai in the current fiscal, "making us a destination as well as a transit point," he said. The meeting decided that work on the Itanagar airport would be commenced with a total investment of Rs2,100 crore by the Airports Authority of India. By the end of next month, additional PPP projects would be finalised for 10-12 existing airports and for 10-12 greenfield airports. These would be awarded during the year.
Is even a fraction of this is achievable? While the PM has set a remarkably high target for investment, he has no control over states that would do the groundwork for implementing the infra projects. After all, land acquisition which absolutely at the heart of any infrastructure project is a state issue. Forget states ruled by other parties, even in states where Congress is in power, Dr Singh will find it difficult to crack the whip. Take for example, Maharashtra. Although Prithviraj Chavan belongs to the Congress and he would listen or obey instructions from the PM, he does not have any control over NCP ministers and their powerful portfolios.
Indian industries have been expressing various concerns regarding administrative delays, deteriorating infrastructure and power situation across states. Especially Congress-ruled states like Maharashtra are fast losing their advantage as industrial hub and pro-industry state.
Over the years, Maharashtra has been an investor-friendly state with stable regulatory environment, strong human capital, easy access to capital and presence of some of the biggest industrial houses. However, Maharashtra's leadership position is being challenged by upcoming states like Gujarat, Andhra Pradesh, Karnataka and Rajasthan. The reason is major bottlenecks in Maharashtra like problems in land acquisition due to unclear policies, delays and difficult procedures for getting various clearances and poor infrastructure.
Political parties in Maharashtra accuse chief minister (CM) Prithviraj Chavan for the policy paralysis in the state. Although Mr Chavan belongs to the Congress, he had to share important portfolios like finance and power with coalition partner the Nationalist Congress Party (NCP), headed by Sharad Pawar. In fact, two days back, Pawar in a veiled attack on the CM said there was collapse of the government's "decision-making process". Maharashtra was losing out on big investments and industrial projects due to delays in taking major decisions, he added.
In short, the policy paralysis and delay in decision making would remain as it is. The PM's bold talk will remain just that-talk. Infrastructure investment does create a multiplier effect. But it is virtually impossible to implement in the absence of strong leadership.