ASIA INC Nov 1994

BUSINESS: India's Reliance group

november 1994

Remarkable Reliance

"India is the land of flying carpets, rope tricks and tandoori chicken, right?" Anil Ambani asks rhetorically as he paces furiously in the wood-paneled boardroom of Reliance Industries Ltd. He rests his palms on the table, brings his face close and says: "Look, I'm a vegetarian; I don't eat chicken. I've lived most of my life in India, but I've yet to see those flying carpets and rope tricks. I don't know those old myths. I know the modern India."

Such cocky self-assurance from a 35-year-old seems out of place in a country where wisdom is equated with age. But everything about Ambani seems out of place in India. In 17 years his family's Reliance has shot up from nowhere to become India's biggest private-sector company -- in sales, profits and number of shareholders. As India liberalizes its economy, Reliance is one of the few companies not running to the babus (bureaucrats) in Delhi and telling them to slow down reforms.

The international community already has taken notice. Reliance has raised $ 590 million in three Euro-bond issues and may become the first Indian company to list on the New York Stock Exchange. The Ambanis have gate-crashed the Forbes list of billionaires, and Reliance's market value of $ 3.24 billion places it 45 th on Business Week's list of the top 200 emerging-market companies. Had the Indian rupee not been devalued in 1991, this $ 1.7 billion company would have made it into the Fortune 500.

Reliance has succeeded by remaining tightly focused on being a global oil-to-petrochemicals-to-plastics-to-fibers-to-textiles manufacturer. "The policy of backward vertical integration is based on our belief in self-reliance," says Reliance joint managing director Anil Ambani, who was educated at the University of Pennsylvania's Wharton School and is the son of company founder Dhirubhai Ambani. "We take the value-added at each stage of the chain and absorb the slack -- like oil majors. Our buzz- word is focused growth, stick to the knitting."

With liberalization in India, Reliance finds itself able to explore opportunities it once only dreamed of. The company wants to mine diamonds in central India and has promised in an ambitious proposal to wipe out waiting lists for telephone connections in dynamic western India. It is exploring for oil and is bidding to supply power to Delhi and Maharashtra, India's most industrialized state.

Ambani's India lies 300 kilometers north of the bursting metropolis of Bombay in what was once a vast mangrove swamp in Hazira. There, encompassing a complex network of pipes, boilers and towers that look like the innards of a post-modernist sculpture, is India's largest private-sector petrochemical plant. With other multimillion-dollar plants in the neighborhood, this former wasteland has become the petrochemical capital of India.

Five years ago this marsh was such an eyesore it seemed only something magical, a rope trick perhaps, could make the land viable. But within two years, a $ 600 million plant was up and running on the 300-hectare site, employing 950 people. Says 26-year-old Hital Meswani, an Ambani cousin and another Wharton graduate, who was put in charge of commissioning the plant: "We're 10 years ahead of the rest of India. We've gone for state-of-the-art technology, modern safety rules, recycling practices and effluent treatment." Adds Meswani as he strolls on the verdant lawns, admiring the flower bed: "American experts said we couldn't grow a blade of grass here."

It is a scene that gladdens Dhirubhai Hirachand Ambani, the 62-year-old Reliance patriarch. Son of a poor teacher, Dhirubhai was born in Chorwad, a drought-stricken dot on the Arabian Sea. There was no money to study beyond high school, so Dhirubhai left for Aden, Yemen, where he worked at a French trading company and later operated a Shell gas station. He even helped refuel aircraft during the Suez crisis. One day he noticed that the silver content of the Yemeni currency, the rial, was higher than its face value. He began shipping rials to a London dealer, reaping a profit of several thousand pounds. "I don't believe in not taking opportunities," he has said in the past. "As I filled the cars and watched the huge oil tankers roll in, I became obsessed with the idea of owning my own petroleum company."

He returned to India in 1968, when Indira Gandhi was nationalizing vast sectors of the economy. He traded yarn and commodities, cycling through dusty villages, sniffing out suppliers and reviving old contacts in Aden. He also set up a small yarn-making facility. He sensed that socialism was an aberration in a civilization that worshipped Lakshmi, the goddess of wealth. And he gambled that Indians, accustomed to cotton and homespun fabrics, would accept artificial fibers as the economy expanded.

His bet paid off. Today Reliance is India's biggest manufacturer of synthetics. The country's annual per-capita consumption of 17 meters is still below the international average of 40 meters, but production is growing 44 percent a year. Artificial fibers account for only one-third of the Indian market because they cost more. The strong domestic cotton lobby is afraid of losing ground, forcing synthetics manufacturers to pay higher taxes. However, with the growth of the middle class (see "Upsurge in India," Asia, Inc., January 1994) and more working women seeking easy-to-care-for fabrics, the use of synthetics will inevitably rise. In three years Reliance expects to become the world's largest integrated manufacturer of polyester.

It is the same story with plastics, which Reliance makes at its state-of-the-art plant in Hazira. Indian annual per-capita consumption is 1 kilogram, one-fifteenth of the world average. Meswani compares India to the U.S. of the 1950s and 1960s, when consumption took off.

The main reason for Ambani's success is the care with which he picked his licenses -- government permits to set up or expand a business -- unlike some Indian companies that have become unwieldy conglomerates with interests in textiles, tea, telecommunications and tableware. His nonconformist style is often evident. When a group of leading industrialists in Bombay met last year to try to stall Finance Minister Manmohan Singh's economic reforms, Dhirubhai Ambani was conspicuously absent.

Ambani's goal was to establish a sufficient economy of scale so that his plants would be efficient internationally. Says son Anil: "To develop world-scale technology and operations was the cornerstone of my father's vision from Day One."

Today Ambani is viewed as a visionary. But during the 1980shis name carried unwelcome baggage. Critics say Reliance owes its size to political connections, that it placed obstacles in the path of rivals, cornered licenses and influenced import duties. Says a prominent Ambani critic, S. Gurumurthy of India's anti-establishment daily Indian Express: "The Ambanis immunized themselves against investigations by the state." Indian politicians who defended the country's controlled economy in the pursuit of self-reliance were the butt of many jokes: then Finance Minister Pranab Mukherjee was called the minister of Reliance, not self-reliance.

But unlike other manipulators of the permit-and-license system, Reliance created physical assets, not phantom plants, and it rewarded investors; it was not a pyramid scheme. The genius of Reliance's strategy lay in its decision to make raw materials at each stage. Thus its competitors became beholden to Reliance. The company's research-and-development group identifies new applications for its products and educates end-users, creating new markets. For example, it exports liquid alkyl benzene, an ingredient in detergent, to Colgate-Palmolive Co., Unilever PLC, Henkel KGaA and Procter & Gamble Co.

Reliance has, at times, taken its backward-integration strategy to absurd lengths. Perturbed by the harsh tone of the Express, the Ambanis bought the venerable Commerce and the middle-brow Sunday Observer. They merged the two newspapers to launch the Business and Political Observer, a daily that sought to outdo the Express in hurling vitriol at longtime rivals such as Bombay Dyeing Chairman Nusli Wadia and former Prime Minister V.P. Singh. On one memorable occasion, an Observer editorial referred to Express journalists as "harlots with leprous faces."

But another uncharacteristic "integration" has been a masterstroke. Piqued that big advertising agencies were not devoting resources to then fledgling Reliance, the Ambanis created their own agency, Mudra Communications Ltd. Today it is the largest Indian-owned ad agency, and third-largest in India after Hindustan Thompson Associates and Lintas, with billings of $ 51 million. Mudra also is expanding abroad, the first Indian agency to do so.

While international analysts cheer Reliance, there is some skepticism in India. Rahul Bajaj, chairman of Bajaj Auto Ltd., the world's largest scooter manufacturer, is critical of vertical backward integration as a strategy. "I need steel to make scooters," he says, "but that doesn't mean I should set up a steel plant." And G.M. Ramanathan, managing director of Indian Petrochemicals Ltd., an efficient state-run company, says: "There is excess capacity for petrochemical products in the region now. The outlook is grim. I don't really see any advantage for vertical integration unless the economies of scale of end-products justify it."

Anupam Puri, managing director of consultants McKinsey & Co. in Bombay, disagrees. "Dhirubhai is a master strategist who instinctively understands economies of scale," says Puri. "When you start with the right process and technology and build two to three times what others are doing, you have tremendous cost advantages. Reliance understands the virtues of vertical integration. They have excellent understanding of the engineering involved, and they are good financial engineers."

Despite the praise, Reliance officials admit it will be some time before they can achieve their ambition to list their shares in New York. Says Reliance-watcher Allison Blasch, analyst at Merrill Lynch: "The level of disclosure requirements in America is quite high, and it reduces the comfort level for some Indian companies. They will have to change their reporting structure."

Accounting purists quibble that Reliance shows its foreign-currency loans at historical exchange rates even though the rupee has declined substantially in the past decade. Then again, Reliance creates huge tax reserves despite low tax liability. Says R. Sankaran, director of Bombay-based Ind Global Financial Trust Ltd.: "You could have some discomfort about their transparency and disclosure standards. But it is one company that makes sure its shareholders get dividend warrants two days after the annual general meeting."

Reliance first went public in 1977 with a small issue of $ 2.8 million. Some 53,000 lucky Indians bought shares that rose 15 times in the first three years, notes Gita Piramal, a London-based historian of Indian business. The company has returned to the market 34 times, raising more than 50 billion rupees ($ 1.6 billion at the current exchange rate). Today, 54 percent of Reliance shares are held by more than 2 million small investors in India, giving it one of the largest shareholder bases in the world.

But not all brokers are happy. A Reliance executive laughs: "They complain to Mr. Ambani that the company is only creating assets and paying too little in dividends." Explains Jardine Fleming India director Ajit Dayal: "Reliance is a much misunderstood company. It is one stock that performs, month after month after month, but sattawalas (speculators) can't understand the complexities."

Brokers may be annoyed, but lay investors seem to instinctively understand Reliance, voting with their pocketbooks every time the company asks for more. But frequent equity dilution has moderated Reliance's earnings per share. An enraged Western banker familiar with the Indian corporate scene says: "They should take the company private. They have diluted the equity so much it makes a mockery of the shares of individual shareholders."

The shares outstanding have almost doubled in the past four years, thanks to three issues of global depository receipts, the merger of Reliance Industries with Reliance Petrochemicals and the conversion of some convertible debentures. But Merrill Lynch's Blasch says: "They have an incredible ability to go to the market, and the returns to shareholders have been high even with equity dilution."

Reliance runs its public-offering campaigns with the e'lan of a "Bollywood" (Bombay's Hollywood) blockbuster, buying TV and radio time. Says Anil Ambani: "We get thousands of moving letters from investors. Capital appreciation has allowed peasants to get their daughters married in style and some ailing people have been able to pay for medical treatment."

Despite this show of faith, Reliance does not fare well in an annual poll of India's most admired corporations by the country's largest market-research firm, MARG. Says MARG managing director Titoo Ahluwalia: "Unfortunately they're still seen as hustlers, even for a company that performs so well consistently. Dhirubhai has done a fantastic job, and in polls of management graduates he scores high on entrepreneurial drive. But he doesn't get the kudos he deserves for the company he runs so well."

Anil and his Stanford University-educated elder brother, Mukesh, 37, are in the office 11 hours a day. They have dropped long-winded memos, preferring strategy sessions. The pace at the Reliance headquarters is frenetic and breathless. Historian Piramal observes: "I've seen everyone edgy and always pressed for time. Yet there's little indication that they'd rather be anywhere else."

Mukesh and Anil represent the bright young Midnight's Children (born after India's independence), unburdened by the historical baggage of an ancient civilization. As Mukesh said once: "We have fire in the belly. We want to show the world by doing something. When people talk of globalization, they talk of going somewhere outside. I think we have to worry about all those guys coming to India. Let us prove when they come here that we're as good as anybody."

Can Reliance live up to that ambition? "Of course it can," says McKinsey's Puri. "It will comfortably quintuple its size in the next 10 years. Refining in India is competitive with the right configuration because processing costs are lower here than in Southeast Asia. There's enough protection to prevent dumping."

Reliance lives up to its corporate slogan: "Where growth is a way of life." Anil looks out the window at the aquamarine sea lashing Bombay's waterfront. "Fifteen years ago Reliance was not even in the top 100 companies of India. Now we're No. 1. Who says this is not a land of opportunities?"


(Accompanying box)

How Not To Take Over A Company
Politics - temporarily - thwarts Reliance's acquisition of Larsen and Toubro

Among the many stories from Reliance's checkered past, perhaps the most interesting is its attempted takeover of highly respected Larsen and Toubro Ltd. (L&T), India's largest private-sector engineering company. The L&T drama began in August 1987 when Dubai-based Indian businessman Manu Chhabria bought roughly 1 percent of the shares of L&T. That worried L&T Chairman N.M. Desai because Chhabria was known as a trader, not a long-term investor. So Desai invited Reliance patriarch Dhirubhai Ambani to invest in L&T.

Reliance, L&T's biggest private-sector customer, bought 12.4 percent and got two nominees on the L&T board. L&T later won a substantial contract to build Reliance's Hazira petrochemical plant. Meanwhile a state-linked financial company bought L&T shares from India's biggest mutual fund and largest insurance company. It then sold the shares to a little-known investment company connected with Reliance. Desai surprised the L&T board by stepping down, and Ambani took over as chairman. Bombay's clubby corporate world was shocked at what seemed to be a behind-the-scenes takeover.

About that time, Reliance's long-time rivalry with Bombay Dyeing took a sinister turn. The two companies represented opposite poles of India's corporate hierarchy. Bombay Dyeing head Nusli Wadia, scion of an old Bombay family, was part of establishment Malabar Hills and Ballard Estate; Ambani was the brash upstart from an aggressive, post-independent India, who had achieved more in a decade than the Wadia family had in a century.

The rivalry turned vicious when Bombay police arrested a Reliance official for plotting the murder of Wadia in 1989. Reliance called the charge "preposterous," saying that Wadia was blaming business setbacks on Reliance and that the accusation was designed to undermine a forthcoming L&T public offering. But Wadia said Ambani's sons held him responsible for a recent stroke suffered by their father. He said he knew "a lot" about Ambani that could be detrimental should former Finance Minister V.P. Singh, a Reliance nemesis, come to power. And, Wadia said, by getting rid of him, the anti-Reliance Indian Express could be silenced, since it was known that Wadia was bankrolling the troubled newspaper.

The murder conspiracy never came to trial. But it was still too early for the Ambanis to relax. In November 1989 Singh became prime minister. One of his first acts was to sack officials who had acquiesced with Reliance's takeover of L&T. One state-owned financial institution sought an extraordinary general meeting of L&T. The move succeeded: Ambani left the L&T board, and a banker, D.N. Ghosh, moved in as chairman. Ghosh immediately halved the size of suppliers' credit granted to Reliance and trimmed L&T's public offering.

Singh's prime ministership, however, ended in less than a year. Ghosh left, and today Reliance remains the single largest private shareholder in L&T, which it views as a strategic investment. Analysts say it is only a matter of time before Reliance formally takes over L&T.