Calculus Reliance AGM: Behind the Speech and the Numbers

RIL may find it difficult to keep its promises of big-bang investments and growth given the global challenges Reliance Industries is a large conglomerate with a presence in multiple businesses and is constantly evaluating new opportunities for growth. Every year at the annual shareholders' meeting, Mr Mukesh Ambani, the chairman of RIL, announces new projects and diversification into other areas which take some years to fructify.  For instance, in 2006, Mr Ambani announced the foray into the retail sector. Today, the retail business has 1,300 stores in 18 states with revenue of . 7,599 crore in 2011/12, up 25% over the year-ago period. The expansion into broadband was announced in 2010.  In the past 10 years, Mr Ambani's AGM speeches have contained announcements about similar ventures into other areas. In 2007, Mr Ambani had talked about a shift from the industrial and services sectors to cover agriculture and rural sectors.  "This is probably for the first time that a corporate in India has focused on the agriculture and rural sectors as fulcrums for growth," he had said. There is no official word as of now about how RIL is planning to tap this potential.  In the 2010 AGM immediately after the annulment of non-compete agreement with Anil Ambani, the RIL chairman announced that the company was ready to enter India's electricity landscape. "We are drawing up specific plans for mega-investment in this sector with clean coal-based power generation projects, hydel projects and also in nuclear power as and when it is opened up." There is no word as yet about this as yet.  Given RIL's size and the challenges in the economy, there is nothing surprising about this. Sometimes, big projects are reviewed several times and go through changes before they are implemented. On other occasions, economic and regulatory challenges may prevent a project from taking off.  A careful reading of Mr Ambani's speech, keeping in mind the second point, highlights two interesting aspects. One, RIL is investing heavily in traditional businesses possibly due to lack of opportunities elsewhere; second, growth in the coming years and decades is likely to be tough and RIL as the country's biggest private sector company is possibly battening down the hatches in preparation for the coming storm.  Take the first point. Mr Ambani announced that the company will invest . one lakh crore and double operating profit in the next five years. He didn't specify the industries, but that may be because the company has already said that it will invest . 66,000 crore in refining and petrochemicals businesses in the analyst meet after the fourth quarter results.  The additional money of . 34,000 crore is likely to be spent on E&P and may be other business like retail and telecom. But the interesting aspect is that about 75-80% of RIL's investments in the next five will be in its traditional businesses.  There could be various reasons for this. RIL needs to focus on traditional business to retain its competitive edge. But it could also be true that the company has not identified any additional growth areas and is simply sticking to the knitting. Also, E&P needs considerable attention due to problems with KGD6. The most important part of the capex seems to be the coal gasification unit that will dramatically expand RIL's refinery margins and add nearly $1.5 billion to its operating profits. But that will come up only three years down the line.  This brings us to the second aspect, the possible strengthening of storm clouds on the horizon. Between the years 2002 and 2007, RIL's operating profit had trebled. In the next five year band, 2007-12, it had doubled.  Growth rates today have come down and many companies believe that the next five years will be tougher than the previous five, especially if the global financial crisis worsens and the eurozone breaks up. RIL is unlikely to be insulated from all this and Thursday's forecast of doubling operating profit in the next five years has to be seen in that context. It is not very ambitious and only seeks to maintain RIL's past rate of growth.  Of course, it could also be true that Mr Ambani is just being conservative and that growth will outstrip his projections. But given the problems at D6 that is unlikely, in the short run at least.  In his speech, Mr Ambani talked about achieving a total sustained production of 60 million cubic metres in the next three to four years after listing a pipeline of projects including coal bed methane and satellite offshore fields. This could only mean that KG D6 is likely to be a problem area for some more time.