A Versus A, Round B

August 4, 2005. It was just 24 hours after Mukesh Ambani addressed the Reliance Industries Ltd's (RIL) shareholders for the first time since the split, announced six weeks earlier, with younger brother Anil. One asked people on both sides about the details of the process that will allow the two brothers to manage different group businesses as sketched out in the patch-up agreement inked in June 2005. Instead of answering the query, both camps pointed out adverse comments against the other in recent analysts' reports. The attitude convinced us that the rivalry between the two brothers wasn't over. In fact, the stage was simply set for future skirmishes, tussles and battles.

Despite the mid-2005 separation deal, it was clear that there were hurt egos in both camps. Too much mud had been hurled—some of it personal allegations—against the brothers and their respective aides. It won't be easy to forget and forgive. The following months provided enough evidence that this was indeed the case. And events in the past few days (see box on page 54) proved it conclusively. But if you now think that the truce announced by the brothers last week is the final one, think again. For there are several areas and issues on which the two Ambanis will clash yet again over the next few years. This fight ain't over yet.

From now on, the Ambani vs Ambani confrontations will hinge totally on an ongoing game of one-upmanship. Nothing reflects this better than the race between Mukesh and Anil to announce mega projects—not one or two, but several of them at the same time. If one goes by Ambani-speak and the information originating from the two camps, the MDA (Mukesh D. Ambani) group and the ADA (Anil D. Ambani) group will together invest an unbelievable Rs 1,80,000-2,00,000 crore over the next five years. To put it in perspective, it amounts to nearly 0.75 per cent of India's current GDP.

"On the whole, the mega investment plans of the two brothers sound a little like rhetoric," says an analyst with the Mumbai-based IDBI. Adds another one: "It's clear the two are out to show each other that they can do it on their own. It's a race for credibility." A lot more is at stake for Anil, who's been branded as an extrovert networker and has never created a business empire. Post-split, this feeling has gained ground as Anil grappled with growing criticism against Reliance Energy's—now an ADA group firm—power distribution operations in Delhi and Mumbai. One can't forget the battering that the ADA group got due to allegations that it was one of the bidders which influenced the bidding process for the privatisation of Delhi and Mumbai airports. Finally, Anil lost that race.

In comparison, Mukesh has always been known as the builder, who set up mega projects (like the Jamnagar refinery and the Patalganga petrochemicals complex) in record time. Therefore, Anil wants to prove his credentials as a visionary of matching heft, and a successful entrepreneur. "He's going too fast. It's as if he's under pressure to get into the limelight. There's a (business) announcement from his side every day," agrees a Bangalore-based analyst. He's right because it's rare to open the morning newspapers and not find details of a new plan, acquisition or strategic decision by Anil.

Obviously, Mukesh will not allow his younger brother to hog the headlines. He has said that he wants to double RIL's turnover by 2010. "Doubling the size of a company in 4-5 years is a difficult call," says S. Varatharajan, senior analyst, Motilal Oswal Securities, but quickly adds that "looking at the investments in RIL's refinery business and the company's position in the petrochemicals segment, it looks achievable. " The factors that weigh in Mukesh's favour are the steady cashflows from existing businesses and RIL's operations, which have huge capacities and are fully integrated and allow the management to extract the benefits of synergies as well as economies of scale.

But Mukesh's Achilles' heel may be his big-budget foray into the retail sector. For nearly two decades, critics have maintained that the Reliance group has been unable to emerge successful in areas where it has to deal directly with the end-consumers. For years prior to the split, Mukesh desperately tried to dispel that notion by taking an ambitious plunge into telecom. He tried every tactic in the book to grow Reliance Infocomm, which eventually landed in Anil's fold. Unfortunately, in the months prior to the split, when the two siblings were fighting publicly, Anil dented Mukesh's ego by revealing how the operations and the finances of the telecom venture—always considered as Mukesh's baby—were in a mess.

Retail will provide another chance for Mukesh to prove he can succeed in a consumer-oriented area. Analysts agree that it'll be the elder brother's new public face after he lost Reliance Infocomm. "For Mukesh, the retail venture will provide a bigger and better interface with consumers," says a Mumbai-based analyst. After all, Mukesh's talking about building 400 superstores and hypermarkets this year, and the figure is likely to touch 1,500 by the end of the next fiscal. The first few retail stores will open in Ahmedabad, Surat and Calcutta by June this year. If one adds the number of petro-products outlets that he's thinking of, the total will be 5,800 retail outlets (of all kinds) over the next few years.

RIL has other exciting retail plans. It has roped in Rajeev Karwal, the former ceo of Electrolux-Kelvinator, to head the consumer durables division of its retail venture. Essentially, the MDA group will directly hawk durables from its retail outlets. Insiders contend that annual revenues from consumer durables, slated to commence this September, will exceed those of several large-format retailers in the country. In private, senior managers in existing durables firms agree that the entry of a behemoth like RIL can drastically prune the already wafer-thin margins. And, if RIL starts selling self-branded appliances—as it plans to—it will result in the emergence of a giant which can easily take on the likes of Samsung and LG.

The downside is that retail is a tricky sector. "Several Indian retail players have announced mega plans. But implementing them has always been an arduous task due to operational bottlenecks. There's also a lack of expertise to roll out the kind of supply chain and back-end infrastructure in the double-quick time that RIL is planning to do," says a Mumbai-based analyst. Industry observers say that even McDonald's, with all its years in fast food, took nearly three years to perfect its act in India.

That's not preventing Anil from also betting big on retail. The chances are that the two brothers will compete to buy prime real estate. The first collision happened when both bid for Mumbai's Bandra-Kurla complex. Mukesh won by paying over Rs 1,100 crore. There may be more incidents, as both the Ambanis are seeking to buy land on highways—Mukesh for his petrol pumps and Anil for his road projects. Given the sheer scale of their retail plans, both are likely to lobby the same set of state politicians and bureaucrats to extract concessions. It'll result in a head-on crash.

Anil realises that he can score a moral victory over Mukesh if he can turn around Reliance Infocomm. The former is actively scouting for management talent to do so. In the past few months, Reliance Infocomm has launched several price-slashing schemes to woo new customers and expand volumes. The one lesson that Anil learnt from Pradip Baijal, the head of the Telecom Regulatory Authority of India, during their meeting prior to the split was that the future of the business lay in operating at low tariffs, achieving high volumes and earning wafer-thin margins. Anil is putting that strategy in place.

He's hoping to take advantage of the inevitable convergence. Sources say the ADA group is thinking of buying an existing TV channel. He's getting into IPTV (TV through the Internet) through an agreement with Microsoft and time-shifted TV (where consumers can view any programme at the time of their choice), which has been launched in Gujarat. By the second half of 2006, Anil's DTH project, Reliance Bluemagic, will roll out. "He's moving up the value chain—and fast. Adlabs (which he acquired last year) has given him a start in the entertainment space, and his convergence initiatives will help him when (high-end) services like 3G are introduced in India. This is where he'll score over others (by combining TV, telecom and entertainment)," explains an analyst working with the ADA group.

The younger brother will, however, have to watch his back at all times to defend himself against any sudden attack by the other side. Despite the ten-year non-competing clause incorporated in the split agreement, both brothers are venturing into similar areas. One example is that of retail; the others can be areas like multiplexes and privatisation of airports. Anil was the first to get into multiplexes—and other entertainment segments like FM radio and film distribution—through Adlabs. Once Mukesh sets up his malls, he can also build multiplexes—either himself or through business associates.

Anil's aides point out that the peace agreement signed between the two brothers in June 2005 "noted that the previously agreed position was that the business relating to airports and airports infrastructure is exclusively reserved for Reliance-ADA group without any exceptions". Later, the more detailed agreements on various businesses stated that RIL (controlled by the MDA group) "can enter the business of airports and airports infrastructure" if it's "claimed to be incidental/integral or necessary for any of its businesses" or "where the ADA group has not been successful in privatisation of airports." Will Anil's losing out on bids for Delhi and Mumbai airports now open the floodgates for Mukesh to jump into the fray?

What'll be a bigger headache for Anil is the challenging task to give shape to mega power projects, which're still at the drawing board stage (see box above). "He's talking to the Orissa government about a massive Rs 48,000 crore, 12,000 MW unit. There can be a number of roadblocks, including opposition to Reliance Energy's move to single-handedly access the bulk of the state's coal reserves," says a Delhi-based analyst. The power distribution business, another priority area for Reliance Energy, continues to be a difficult one due to the slow pace of reforms in the power sector. "The experience in Orissa and Delhi shows that the profitability of distribution firms is tough in the near-to-medium term," explains another analyst.

In conclusion, most analysts, experts and Ambani watchers agree that the all-consuming tug of war between the two brothers will prove to be harmful for both groups. It may just seem that Mukesh is on a stronger wicket than Anil because many of the latter's businesses are in the sunrise sectors and, therefore, imply higher risks. But simultaneously taking on several projects at the same time may prove to be Mukesh's undoing. No one's thinking of the risks. Both the brothers are focusing on ways to win the confidence of their shareholders—the bulk of whom will soon be the same due to the demerger process—and their consumers. In such a scenario, mere announcements of big plans will not be enough. The two Ambanis will have to prove that they can finally add to the shareholders' wealth, even while they continue fighting. Ideally, they'll have to convince people that they're as good as their late father. And that they're the entrepreneurs of the 21st century.