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July 21, 2000
'Our investments in Reliance Infocom would be larger than what we invested in Jamnagar'
Y Siva Sankar in Bombay
After announcing the 2000-2001 first quarter financial results in Bombay on July 20, Reliance Industries's managing director Anil Ambani interacted with mediapersons. He expounded his vision for India's largest private sector enterprise.
On whether Reliance Industries Limited or RIL is really growing or is it just perceived growth:
All the major capital expenditure programmes that we have submitted over the last three, four years, have now been implemented, which is Hazira and Jamnagar are the two growth centres that have been used. We have already announced doubling of polyester capacity and debottlenecking our cracker unit for 24 million tonnes… building PTA plants and building other plants. So, if the question is, is this the end of growth, the answer is NO.
Have we learnt anything over the last five years as we implemented Rs 200 billion of asset building -- Rs 400 billion if I take Reliance Petroleum and other utilities? Clearly, yes. What we are doing now is doing everything with a focus on internal equity, and saying there has to be volume growth, there has to be assets growth but it has to be accompanied by profit growth, by earnings growth, by enhanced levels of ROE (return on equity). So I think we have to look at this in its totality rather than: 'Are we are building assets for this quarter or not?'
So, in example, I would say, growth we have been having very rapidly, but, maybe, the sequencing of that will not be as apparent to you (mediapersons) as it apparent to us.
On RIL's investments in the proposed company for the Net-age, Reliance Infocom:
Our investments in Reliance Infocom would be larger than what we invested in Jamnagar. If I put Jamnagar investments in perspective, it is roughly Rs 135 billion on the refinery project and roughly Rs 40 billion in RIL's petrochemicals complex. In effect, we are talking about in excess of Rs 150 billion. That is the project cost in terms of the outlay. Now the question is what bits and pieces do we assemble, what we would do with our partners, our technology partners, etc, that detail of financial architecture is still wide open for discussions.
On whether there would any slowdown in exports of RIL's petroleum products due to anti-dumping duties:
I think anti-dumping duty measures are there across the world on all commodities. There are enough markets all over the world for us to export all our products. For us, fortunately, quality is built into our products. Sure, dumping is going to have an impact, but not in a way that can lead us to shut down our plants.
On who actually subscribed to RIL's open offer for BSES stock:
The 11 per cent that the company received was from retail as well as institutional investors. Actually not from LIC, GIC and UTI, as they have said in their own statements. So between foreign institutional investors and retail investors, the 11 per cent has come in.
On distribution of petroleum products in India and what Reliance thinks of the public sector petro distribution firm IBP:
As the government makes up its mind, we have to wait and watch the situation. As far as Reliance Petroleum is concerned, we will have our results on July 29, 2000, so more information would be available on the petroleum front. Conceptually, we have applied for marketing rights. Marketing rights are available, or should be available to us as long as we are invested in Rs 20 billion in IBP -- actually we have invested much more than that.
The question is, the deregulation ends in 2002 and the government has to make up its mind when would they be willing for a marketing tie-up. So, one is, marketing on our own, or in alliance with existing petroleum companies, or acquiring companies that have marketing infrastructure, and in this case, the only company happens to be IBP.
There is considerable debate as to whether the business will happen or not. So it would be premature for me to say yes or no. But clearly it is a candidate that would be interesting for anybody who is looking at petroleum marketing. If it doesn't have a right value then it is clearly not convenient for us to pursue.
Pricing of petroleum products in the context of import duties:
With India's integration with the global economy, we have no choice but to be dictated by global prices. As far as our pricing policy in India is concerned, we have pretty consistent over 20 years. And we are unlikely to change it. Which means, our 30 or 40,000 customers across our various product groups, be it polyester, be it polymers, have to have a value proposition, which would mean that on an average, the Indian prices would be between five and fifteen per cent less than the imported landed prices at which we can import. This has been consistent over the last many years and I feel this is unlikely to change.
Everybody is looking at crude prices. That is crystal ball grazing, whether it is 25 dollars, 15 dollars, 30 dollars…. We can't ignore the fact that petroleum product prices are overall linked to crude prices. So it would be very difficult to predict what would be the pricing environment in future. Should the oil prices decline, still there would be a time lag between crude price declining or raising and product prices increasing or decreasing. So in that particular weeks or months, depends on what it is, we have our margin compression or margin expansion, but that is only temporary.
On selling petro products via the Internet and the possible synergies in future among Reliance Industries, Reliance Petroleum and Reliance Infocom for selling the group's petro products:
All the major commodities are getting into Internet Exchange Board, be it steel, petrochemicals, oil, aluminium or copper, everybody has been talking about a virtual marketplace. You will have to give an option to your customers to do it. Whether a customer chooses to buy on that, you really can't force him to do that.
As for synergies, there are practically none now. However, the experience of building capital intensive plants, understanding financial engineering, implementing these projects, mobilising large resources whether they be in power, construction, financial…..all these will be a really core competence for Reliance to build on it….I do not know how many companies in India can wire up 100 odd cities in a period of 24 months….That is the core competence that comes out of implementation of chemical and other projects all over India.
On whether RIL, already eyeing IPCL, is also interested in HOC:
As far as IPCL is concerned, the last communication that we had from the government was in October 1999. As far as HOC and allies of HOC are concerned, clearly whatever that can create advantages and value for us, it will interest us.
On RIL's ADRs:
We are basically based on our buyback resolution and as we implement that, clearly we rule out any new issuance of equity. So any area programme will be an exchange programme of converting our outstanding GDRs (roughly 7 to 8 per cent of our outstanding capital) into ADRs… we are just…some option has been given to GDR holders… we have not put any definitive timeframe on that. Be assured there won't be any new issuance of equity.
On whether Reliance Infocom would offer educational services on the Internet: Clearly, education is an important ingredient, though it may not have been highlighted among the host of services to be offered by Reliance Infocom. Education is clearly one of the important aspect of using our broadband width.
On whether the Chatterjee Group is the only competitor to RIL in its bid for IPCL:
There were initially four players: Dow Chemicals, Mitsubishi, Chatterjee and Reliance. At the moment, to the best of my knowledge, there are only two players: Reliance and Chatterjee.
On the project implementation and corporate aspects of Reliance Infocom:
As far as the timeframe is concerned, the broadband network connecting the cities…we are looking at 24 months. The investment numbers would be Rs 140 billion to Rs 150 billion. It would be too premature to talk about returns as we put the structure into place in the form of, really, all the details. We have announced as part of the capital allocation framework that we are already looking at a rate of 20 per cent plus return on equity.
On Reliance's foray into the insurance industry:
We will be entering both general and life insurance. This will be primarily a Reliance Capital initiative. We will be doing this, both general and life, without any partners. Our partners will be Indian. Health insurance is also part of the strategy, it is not a subset of it, but it will be governed by life insurance.
On whether Reliance will enter the agri-business:
We have been experimenting with a few things, in the form of a pilot project in Jamnagar, on a green belt of over 2,000 acres. We are looking at the sector very closely.
On the promoters of RIL raising their stake to 40 per cent:
What we now are defining as a 40 per cent stake is based on the new listing guidelines and filing with SEBI. We did a filing, Reliance Industries, of what they classify now as a person acting in concert and it is under that definition. So we are sticking to just one definition and that is 40 per cent.
We have the ability of using half per cent in a year, so possibly in the course of the next eight or nine months which is the year ending March 31, 2001…. The limit is prescribed by SEBI that this has to be done in a year or within that.
On whether Reliance will enter biotechnology:
Reliance has been examining a number of areas for future growth and investment. And biotechnology is one of the areas we are looking at closely.
On how Reliance will make the transition from the old economy (where its employee cost in India is one-sixth of the international level) to the new economy (where the employee cost is higher): At the annual general meeting of RIL, we have passed a resolution for ESOP programme, perhaps the first programme to be announced for all the people for Reliance. It is aimed at not only retaining talent but attracting talent and compensating them with what is happening in the markets. So it will not be only pure cash compensation, we also offer ESOPs for our businesses. Whatever resolution we have passed at the AGM allows us to issue ESOPs even to subsidiary companies. So it is not necessary….so Reliance Infocom people or the personnel who work for Reliance Infocom also can get Reliance Industries stock options. We have to do what is practised in that particular industry. So the infocom industry package says very low base salaries and very high ESOPs and that is what we need to do.
On whether Reliance Industries (which said its exports now account for 20 per cent of its total sales) is gradually moving away from India:
I think everybody wants us to grow into a global company. When we export more, then people are talking about whether we are moving away from India. When we sell more in India, then people will say why we are not exporting. We treat the world as one market. The differences in geography -- this is India, this is Nepal, this is United States -- our customers don't recognise it.
Let me give an example. If there is a chemical exchange, as long as you meet the quality specifications, the customer does not care what the origin of the product is. We treat our customers as the most important people for us. We treat markets without bounds.
We don't really care whether we sell in India or abroad. If we do have a situation where we move towards capital account convertibility, one year or three years or five years from now, there is going to be no difference in saying this is Indian capital, this is international capital. So there are really partitions in our mind and that requires a mindset change.
On the value proposition in BSES for Reliance:
The value proposition for investment in BSES is clearly is the distribution, which they have not only in Bombay but in Orissa.
The ongoing reform programme and the unbundling that every state has to do which is to separate generation, transmission and distribution (of electricity) and for every part, you have to take the ultimate customer risk. Nobody is going to stand in the queue and guarantee you all the time in your business. So clearly, generation, transmission and distribution is going to be a focus area for the Indian economy. And we believe that BSES can play a very important role in that.
Whatever are the integration benefits and the convergence benefits of converting and converging power and telecom or communication in general…is another interesting area to look at. It has happened all over the world. Why shouldn't it happen in India?
There is going to be tremendous amount of value to be created with…for example, the million households in Orissa who are customers of BSES. You will have to get away from just selling power to them. Or selling power at a particular price. You have to do it differently, you have to do with creativity.
And I think it is that entire value proposition, including the talented people of BSES -- I think there are some 5,000 to 6,000 people who work there -- that becomes a very interesting proposition for us.
Now what is the point in having BSES, BSES Telecom and Reliance Infocom? BSES has BSES Telecom because the power business is regulatory. All your returns are regulated. So he has to have BSES Telecom. Why talk about only BSES Telecom? They have BSES Washeries. For coal washing. It is an other company. Because, in the power sector, distribution has got returns which are capped on a financial results basis.
BSES has created maybe eight or ten subsidiary companies which are part of knowledge-related businesses. So that was how BSES Telecom was really made. Reliance Infocom is not a substitute to BSES Telecom. The only area of overlap will be the two million households that they (BSES Telecom) have in Bombay. Other than that, what is BSES doing in infocom? Nothing much! What they would do in future is a different issue.
But when you look at it in totality, we think there are synergies between the two million households in Bombay and one million households in Orissa, and Reliance has already invested as a cellular phone operator in Orissa. And there may be synergies that we can work together and enhance value for both, Reliance shareholders as well as BSES shareholders.
On whether Reliance Capital would be merged with Reliance Petroleum:
We are not proposing any cocktail drinks.
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