Reliance Buy Back – An Exercise in Futility

Ref: 12A-01 Of 23/Jan/2012 by KALIDAS

PART – 1 (Part 2 will be posted on Friday, 27 Jan 2012)

Water and Money

Water & Money share many attributes. They follow same pattern all the time.

When water is in short supply, the people tend to save it, hoard it or even treat it as most precious commodity – more than even Gold. Almost every member of the family is under tremendous anxiety lest the local water authority in a bid to ration its supply stopped it within a few hours or minutes. Good morning wishes are forgotten and the shouts or rebukes greet the children or young members of the family.

When the same water is in umpteen supply, same people bother least about it. They let it flow carelessly and allow the water leakage to linger on for days without calling the plumber to fix it up.

Money is also following same ritual. When it is in short supply or income is less, the people get tense and run around like wild animals. When same money is in ample supply, the owners go around like spendthrift and waste it without any discretion. It is true for individuals, corporations and also governments.

Too scarce money (like water) is a problem and too much money poses even greater problem. Like water, the money begins to leak from every outlet it finds and the owner loses all sense of proportion, rationality and logic in managing it. It is easy to manage less money (or water) but it is extremely difficult to manage too much money (or water).

RBI’s aberrations:

When India’s Forex reserve touched $300 billions, RBI expressed helplessness in managing it and wanted to engage expert or professionals to manage them as if RBI considered itself as non professional, non expert or incompetent in the field of monetary management. China could manage $3 trillions or $3000 billions, but RBI could not manage even $300 millions. This is why Chinese Yuan appreciated from 8.28/$ to 6.30/$ in less than 18 months (by +24%) whereas Indian Rupee under the guidance of RBI depreciated from Rs 44 to almost Rs 54, (by – 25%).

Mukesh Ambani of Reliance Industries Ltd has also realized that too much money is a big problem for him after 40 years of RIL existence. Rs 70,000 crores is too much for him to handle, and when he saw the fortunes of RIL flagging for a short while, he could not control the urge to lose focus, forgot the teachings of his father and Harward Business School, and embarked upon a journey to waste the money in every small opportunity he saw. The money, like water, started leaking from the RIL Storage tank without anyone noticing it.

Learning from the past…

For almost 40 years, his father (Dhirubhai Ambani) and both sons, Mukesh and Anil Ambani, have been creating and printing shares in the backyard by declaring free bonus shares from time to time with a view to enhancing the value of shareholders. They never paid liberal cash dividend. Their philosophy was ”we give you the paper; go, get out and sell in the market”. That is, we will not pay anything from our treasury but get yourself paid by the open treasury in the form of stock market.

Since they were controlling shareholders, they issued extra (bonus)shares to themselves to the extent of their shareholding – over 40% . When the crores of shares could be issued to themselves “free of cost” what made Mukesh Ambani to open the company’s treasury, take out over Rs 10,000 crores, and buy back the shares from the market paying as much as Rs 870 per share? It was a total loss – in as much as he issued (Sold) the shares to shareholders at “Zero” price, and buying them back at “Rs 870 per share”

There are 327.3 crore shares outstanding, and spending about Rs 10,400 crores amount to Rs 30+ per share outstanding? He would be buying back about 12 crore shares from the market, about 3.6% of total shares outstanding. Why did not he declare special cash dividend of Rs 30 per share instead?

Leakage of Money:

This is what is called the “leakage of money”. It followed three minor leakages in the form of his investment foray in telecom (broadband), hotel and entertainment industry. When the leakages are not arrested at the first sight, they get bigger and bigger, and this is what happened here. When the first “three minor leakages” that cost over Rs 2400 crores did not stop, the leakage got bigger and bigger,  and now would cost Rs 10,400 crores! A trickle if left unchecked becomes a torrent of flood later on.

I do not count his investment into shale gas ventures in USA because it is related to his core business – energy. How other three investments such as Hotel, Entertainment and Broadband Telecom fit into his core business? Indian markets are at very low. There are umpteen bargains not only in his core industry but also other ancillary businesses indirectly related to them. He could have invested there at lower end of the spectrum and potentially made 300% to 500% in next 5 years. We are detailing those opportunities later to justify our opinion.

RIL and other equally large global majors compared…

  • Have you ever heard major energy companies such as Exxon, British Petroleum, Royal Dutch Shell, Chevron, Total (of France) with billions of dollars in their kitty, investing into non core industries like telecom, hotel or entertainment?
  • Have you ever heard IBM, Apple Computer, Hewlett Packard, Google or Dell Computer trying to invest into non – core business such as hotels, entertainment or telecom?
  • Have you ever heard major auto makers such as General Motors, Ford, Toyota, Honda, BMW or Mercedes making investment into non core business diverse from auto trade?
  • Were they all stupid and only Mukesh Ambani was a clever guy?

I have great respect and admiration for Mukesh Ambani. He made correct decision most of the times in the past because he listened to himself or his mentor-father Dhirubhai Ambani. However of late, he has begun to falter by listening to the market forces, so called financial experts and not himself.

Those guys never made even Rs 100 crores either for themselves or for others, whereas you, Mr. Mukesh Ambani, made over Rs 70,000 crores in last few years; so who should you listen to – the mediocre and unsuccessful them or a smart and successful person in yourself?

RIL Buy back is a “subjective investment”…

Let us now see how much his subjective investment into RIL itself will give return compared to same amount he could otherwise invest “objectively” in other companies, some in his own core industries (Oil exploration and production, gas exploration, production and transportation), undervalued companies in his own sector, be they PSU or otherwise, alternative energy related companies in wind and solar power sector, highly troubled core industries, aviation and infrastructure, electrical energy sector such as Power or backwardly integrated coal industry and related financial industry.

It is not the investment itself but the modality of investment that would prove the success of his proposed actions. Each model will differ for each destination company, the industry, security regulations (SEBI rules) and investment products (Stock, Bonds -direct debt or convertible debt securities- and direct project investment)

We have identified various companies of alternative investment (to his own company – RIL) based on following criteria and principles.


  1. Total portfolio = Rs 10,000 cr. minimum or Rs 30,000 cr. Maximum
  2. Individual Investment amount: Minimum Rs 1000 cr Maximum Rs 4000 cr
  3. Currency of Investment : Indian Rupees or US$ in exceptional cases.
  4. Form of Investment : Shares (Equity), Secured Collateralized Debt ( straight bonds or convertible bonds in rupees or FCCB)
  5. Style of Investment : 30% to 40 % from open market (purchase of shares, bonds, CB or FCCB) and 70% (or 60%) by taking stakes in the target company ( so that the target company gets the cash to alleviate its liquidity troubles or for project development)

INVESTMENT TARGET:(Industry and individual companies)

Energy sector

  1. Your own core industry – Oil and Gas exploration, production and distribution.
  2. Highly undervalued own core industry candidates in public sector (PSU) and private sector.
  3. “Alternative Energy Industry” – candidates or AEI – such as Wind and Solar Power, which is the future for next several decades.
  4. Atomic power
  5. Ancillary industries related to his own core industry or company.
  6. large CAPEX oriented electrical energy sector such as power.

Non Energy sector
7.        Troubled Infrastructure companies, which are more than half way through in project implementation.
8.        Aviation industry, a major consumer of his own industry’s products (ATF = Air Turbine Fuel)
9.        Infrastructure Companies which are already half way through in project implementation. This will include power industry also.

Finance sector
10.     Involved in financing any of the above industries

DIVESTMENT (Rs 8,400 cr.) from following industries or companies

11.     Hotel sector – non priority and non related. Amount released : Rs 1000 cr. estimated (est.)

12.     TV Media and Entertainment sector : non priority and unrelated  Amount released : Rs 2400 cr. (est.)

13.     Broadband and Telecom sector – non priority and unrelated. Amount released: Rs 2000 cr. (not sure of amount committed) (est.)

14.     Retail sector – non oil/gas based which is non priority and unrelated such as Reliance retail – such as selling vegetables and food grain. Amount released: Rs 2000 cr. ( not sure of amount committed) (est.)

15.     Real Estate: Non priority and unrelated – except land for future projects.  Amount released : Rs 1000 cr. (est.)

Getting out of non priority or non related sectors (to his own industry) and getting into own but diverse industries, is the advice this Kalidas gives to maximize the earning potential of the large cash holding. No more wandering eyes 360 degree around, but look only 45 degrees from either side of his core industry and company. Just stay focused on your core business with unwavering attention.

Following above strategy would divest him of non core industries, realize Rs 8000 cr. and invest additional Rs 10,000 cr. reserved for share buy back, making him available Rs 18,400 cr. at least. He will still have Rs 60,000 cr. in balance after above employment (Rs 10,000 cr) and redeployment. (Rs 8,400 cr.)

End of Part – 1 (Part 2 will be appended here on Friday, 27 Jan, 2012)

Anil Selarka (Kalidas)

USA, 23 January, 2012


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