The bankruptcy filing of RCOM is only the latest in a series of bad news for Anil Ambani. The decline of his empire is a stark lesson on the perils of over-leverage and excessive diversification.
- RCOM’s debacle is symbolic of a larger malaise in ADAG group companies, which have progressively eroded in terms of value over the years.
- After the split with brother Mukesh, Anil Ambani went for aggressive business expansion and took up increasing amounts of debt.
- While the telecom sector was bleeding itself dry, Mukesh patiently built the foundations for his own telecom venture Reliance Jio.
- Ironically, the launch of Jio hastened the demise of companies like RCOM. Unable to resolve its debt load of over Rs 45,000 crore, RCOM has now been forced to go for bankruptcy resolution.
Reliance Industries was always a beacon of shareholder value in its heyday under Dhirubhai Ambani. It attracted thousands of investors when it listed. But when the assets were divided between his sons Mukesh Ambani and Anil Ambani in a much storied split, two ‘Reliances’ were created. Unfortunately, only the elder brother’s business was destined to prosper. For Anil Ambani on the other hand, things have largely gone downhill.
Anil’s debt-ridden Reliance Communications (RCOM) has moved NCLT for resolution of its outstanding debts, which led to a massive drop of 54.3% in its shares on Monday. Meanwhile, Ericsson is expected to file an application in the Supreme Court, requesting that Anil’s personal assets be seized for not honouring the SC’s order to repay its (Ericsson’s) dues.
TOO MUCH COMPETITION
RCOM had started off as a game changer for the telecom sector, and was a venture close to Mukesh’s heart as well. But under Anil Ambani, the company fell into deep trouble over the past few years due to stiff competition, price wars, weak financials and huge indebtedness. It was compelled to pull the plug on its wireless operations as business became unsustainable.
RCOM had a market share of 17% in 2010 and was ranked second. By the time it shut down, its market share had dropped below 10%. Debt had increased from Rs 25,000 crore in 2009-10 to over Rs 45,000 crore currently.
Ericsson filed three insolvency petitions against RCOM in NCLT in May 2018, as it was seeking repayment of around Rs 1,100 crore in debt. NCLT even appointed three IRPs to run RCOM and its two units – RTL and Reliance Infratel under the bankruptcy proceedings.
RCOM managed to avert the bankruptcy at that time, stating that it had deals with Reliance Jio and Brookfield. It agreed to pay Ericsson Rs 550 crore as a settlement, which has not been done till date. The last nail in the coffin was the refusal of Department of Telecommunications to allow the spectrum sale to Reliance Jio. The DoT asked Jio to guarantee repayment of any past dues of RCOM where applicable but Jio refused to do so. Other than Ericsson, RCOM also owes Rs 232 crore to minority shareholders of Reliance Infratel.
The decline has been typical across the group companies under Anil Ambani. The younger brother had a net worth of US$ 45 billion in 2007, while Mukesh Ambani’s net worth was US$ 49 billion according to the Forbes Rich List.
As the Forbes India Rich List 2018 confirms, Anil Ambani’s net worth had steeply declined to US$ 2.44 billion and he was ranked 66, while Mukesh Ambani was leading the list with a net worth of US$ 47.3 billion. Over a ten-year period after the split, Mukesh’s Reliance Industries has seen a CAGR of 11.2% (sales), 9.4% (profit) and 17.8% (returns) according to Bloomberg. Corresponding CAGRs for Anil Ambani’s group companies were 9.4%, -12.6% and -1.7%. In terms of m-cap, Anil Ambani’s companies have dropped below US$ 4 billion, while Reliance Industries has an m-cap of US$ 98.7 billion, as per a report by FT.
WAS IT BAD BUSINESS SENSE? OR BAD LUCK?
Why have the fortunes of the two brothers been so starkly different? Was it a case of poor business acumen or bad timing? Or did Anil Ambani get a raw deal during the split itself, which was necessitated as Dhirubhai passed away without leaving a will? At that time, refining seemed to be a difficult bet on margins, as crude prices had reached a then record price of over US$ 60 a barrel. Wireless seemed a futuristic business opportunity, and rightly so.
But refining has actually been Mukesh’s biggest asset over the years. After expansions undertaken by Mukesh, it still accounts for around 90% of the profits of Reliance Industries. But Mukesh had something even better in 2010 – an expired non-compete clause that was preventing him from entering telecom, coupled with a remarkable vision that data would be the future in India over the next 10 years.
Mukesh patiently started investing in a speedier 4G network, investing over US$ 34 billion over the next few years. Reliance’s shares were lagging the BSE Sensex for most of this period. But Mukesh continued to build the network patiently, even as players were already bleeding each other to death in the Indian telecom sector.
When Jio ultimately launched in 2016, it was an instant success with high service quality and monthly rentals as low as US$ 2. It had 227 million subscribers and was profitable by July 2018. It was actually like euthanasia for telecom companies that were already struggling from the competition in the telecom sector.
Admittedly, Anil did not have a similar cash cow, but still continued to expand his business empire by assuming increasing amounts of debt. This was a general trend in a number of Indian companies over the past decade, which led to a huge US$ 210 billion load of stressed debt. When RBI started pulling the strings, Anil Ambani’s companies also came under a lot of pressure like other overleveraged corporates.
As is well known, Anil Ambani’s much touted foray into the defence sector has come under a cloud. The opposition has accused the Modi government of unfairly favouring his company in the Rafale deal. The Gujarat government even decided to skip inviting him to this year’s Vibrant Gujarat Summit to avoid any negative perception.
Reliance Naval & Engineering is also flirting with insolvency, and Reliance Infrastructure missed a bond payment in August 2018. Even Reliance Power received a downgrade on its outstanding debt of Rs 8,015 crore from ICRA, due to the poor liquidity profile of its subsidiaries. Reliance Capital is among the better performers, which is also looking to exit non-financial businesses and pare its debt.
Burdened by extensive debt across group companies and also isolated due to controversies surrounding Rafale, the RCOM bankruptcy filing is only the latest in a series of bad news for Anil Ambani. The sordid saga of the decline of one half of the Dhirubhai Ambani legacy is a stinging reminder on the perils of over-leverage and putting your eggs in too many baskets.
Anil may still be able to chart a new destiny on the back of the power, infrastructure and finance businesses, if he manages to chart his way through the debt mess. If he succeeds in doing that, Anil could make a comeback, evidently much wiser than before.