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Reliance Industries continues march to become a global major

It is a company that manages to inspire awe, and at many times, disbelief. On the one hand, the company is the darling of the stock exchanges, a company that can dictate terms on the country's premier bourses, be talked about in boardrooms in the country and abroad and at the same time have all the fund managers of leading foreign institutional investors salivating after its scrip. But the flip side is that this company has often been accused of being involved in underhand dirty tactics in a variety of ways -- like fixing import quotas, preempting licenses, and switching share certificates.

Despite all odds, the Rs 89 billion Reliance Industries Limited has built huge capacities at extremely competitive costs and become a force to reckon with in petrochemicals, both domestically and internationally. And its is for this reason -- its bid to gain global dominance and its ability to do so -- that there is one event that the entire country looks forward to twice a year: the announcement of Reliance's annual and half-yearly results.

It is the ability of Reliance Industries to deliver the goods against all odds that has made its scrip the most sought after paper on the Bombay Stock Exchange. This should not be surprising: starting as a pioneer of branded textiles in 1971, Reliance Industries today covers an entire gamut of operations ranging from textiles to petrochemicals with technology that is the envy of companies around the world.

Today, the small investors in India are excited at the vision of its patriarch, Dhirubhai Ambani, and his two sons Mukesh and Anil, to make the company the largest in the world with assets of Rs 300 billion to Rs 350 billion and a turnover of Rs 400 billion to Rs 500 billion.

The company is slowly moving towards that goal. Consider its half yearly results for the first half of 1997-98. While the rest of the country is still in the grips of a mild recession and many corporates in the automobile, steel and consumer durable sectors have been showing a decline in sales and profits, Reliance has shown an increase of 57 per cent in sales, from Rs 40.41 billion (US $117 million) in September 1996 to Rs 63.3 billion ($175 million).

What has surprised industry analysts is the fact that sales have continued to grow despite the fact that prices have continued to remain stable and have not increased. Reliance's increased profit comes from its large increase in volumes. During the last six months, Reliance Industries has commissioned a new 20,000 tonnes per annum polyethylene plant and debottlenecked its multifeed cracker plant from 50,000 tones per annum to 75,000 per annum of ethylene.

Says Rajesh Mayani, analyst at James Capel B&K, "With its dominant position in the domestic market, Reliance has captured 30 per cent of the market share. It will continue to perform well due to its good fundamental strength, growth prospects and sheer size."

For Reliance, the current year is important as the first year since the near-completion of its new petrochemical complex at Hazira, Gujarat, and in finished products. Reliance has added capacities of nearly 300,000 tonnes in polyesters and 800,000 tonnes in polymers. This increased capacity has played a major role in pushing up Reliance sales at a time when prices have been low. End result: an increase in profit.

With net profits increasing by 29 per cent from Rs 6.51 billion ($180 million) to Rs 8.4 billion ($ 232 million), Reliance today is slowly moving towards that goal of becoming a global player in the petrochemical industry.

BZW's securities analyst Mohan Swamy agrees. "We expect Reliance to end 1997-98 with a net profit of Rs 16.8 billion. Reliance's success is that it operates global scale plants which is a critical success factor in the commodity business and with fully integrated operations. Reliance is thus unaffected by fluctuations in the prices of intermediate products," he says.

With its operating profit increasing to 55 per cent to Rs 13.83 billion as compared to Rs 8.94 billion for the earlier period. Reliance Industries managed to keep its operating margin at 19 per cent because of its backward integration through the commuting of the multifeed cracker and enhanced focus on costs and productivity.

However, interest costs increased from Rs 720 million last year to Rs 2.38 billion, caused by increased borrowings and lower capitalisation of interest due to the commissioning of its new plant. The latter was also responsible for depreciation increasing from Rs 1.71 billion to Rs 3.05 billion.

Yet, despite the excellent results announced, the Reliance scrip tumbled on the bourses because brokers had expected the net profit results to cross the Rs 9 billion mark. The scrip lost Rs 12 from its intraday high of Rs 429 to close at Rs 417 as operators began unwinding their long positions built up over the previous week on the Bombay Stock Exchange.

Similarly, on the National Stock Exchange, the Reliance scrip closed at Rs 399.50, down Rs 30 or 7.14 per cent from its previous close of Rs 430.20. And on the London Stock Exchange, the Reliance Industries GDR was marked down by 97 cents in midday trade to $22.87.

According to Manish Shah, vice-president Gold Crest Securities Ltd, "Brokers were expecting much better results from Reliance and were building up their positions during the last one week. The results disappointed them and they offloaded their shares."

But notwithstanding the slight fall in share prices, Reliance Industries is determined to go ahead with its plan to become a global player keeping in mind the motto of the company: 'If it benefits the company, go ahead and just do it'.

With 10 new plants commissioned since 1986, Reliance Industries has demonstrated that it can create the massive asset base in the shortest possible time. In addition it has produced successful plants on global scales, costs are internationally competitive and it has given considerable long-term value to its 2.6 million shareholders.

As Reliance Industries Managing Director Anil Ambani sums up: "RIL's global competitiveness really stands out and the figures speak for themselves." In a nutshell, no company can beat them -- not yet in the short run.

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