Fairval

Notes on Indian equities, sectors and economy

Posts Tagged ‘Reliance Industries’

Are Ruias India’s most selfless & misunderstood entrepreneurs?

Posted by fairval on October 22, 2016

A seminal deal happened this week: one of the largest ever acquisitions of an Indian company, and as the full page ads mentioned – India’s largest ever FDI. The Ruias sold Essar Oil to a consortium led by Russian oil major Rosneft, at an enterprise value of USD 10.9B (there was separate money involved for associated group companies like Vadinar Port).

With this deal, the group expects debt burden to reduce by 50%. Overall debt at group level could be as high as USD20B. This suggests most of the sale value would go towards debt servicing.

The impact of the deal was instantly felt on the banking system. ICICI Bank, India’s largest private sector bank, which had a large exposure to the Essar group, jumped 7% on the day this deal was announced, and has risen since. At the time of writing, the stock is up 13% from the pre-deal close. In market cap terms, this is a USD 2.8B gain.

All this is good for the banking system, the rupee and the Indian economy. It becomes even better when you consider that the promoters Ruias have pretty much made no money whatsoever in setting up and running Essar Oil.

You read it right. For a company spanning around 2 decades, it appears the Ruias may have made zilch for all their family effort, plus the risk they had taken in terms of corporate, and maybe personal guarantees against bank loans.

Since we don’t have full information, this is what we are assuming – almost entire proceeds will go towards reducing debt. This means the only money Ruias may have made would be from dividend income, and salaries for family personnel.

On this count, the situation appears to be like this: in terms of data since FY02, Essar Oil hadn’t paid any dividend (as per equity database Ace Analyzer). The database does not show data before this. As per FY15 annual report, the only family member directly involved with Essar Oil was Prashant Ruia, who was chairman of the company. His remuneration for FY15 was Rs 43 lakh (Rs 4.3million). This is negligible for a company with a revenue of almost USD15B.

In other words, since the last 15 years or so, Ruias may have earned nothing directly out of Essar Oil. Assuming other than the principal amount of their investment in Essar Oil, they use the rest of the deal money to pay bankers, that’s 15 years of no return for an incredible effort of setting up India’s 2nd largest refinery, and one which pretty complex configuration. It wasn’t just a refinery; Essar Oil has 2500 retail outlets, India’s largest oil retail network in the private sector.

Contrast this with what the other big private sector player in India in oil refining – Mukesh Ambani – makes from his company Reliance Industries. Mr Ambani earned dividend of Rs 1400+ crore in FY16. In the last 5 years, he has earned dividend income of almost USD1B. He also draws a salary, which he has capped at Rs 15 crore per year for the last 8 years. This is besides his wealth from shares of RIL, which is about USD24B.

That is more like it. Unless you are making huge amounts of money, why would you create such a large business?

Unless some of the data above is wrong, this leads to a natural question – just why did the Ruais do it? Take such a huge financial risk, and then make no money.

Group chairman Shashi Ruia said in the press release “It is a historic day for Essar. The transaction demonstrates our unique ability to build world-class assets”. Note the stress on creating history, and doing something world class. Prashant Ruia’s quote also emphasized the group’s ability to create benchmarks. He said “The deals we have done have led to an FDI infusion of more than $30 billion into India”

I guess all this is not easy for a simple mind like mine to understand. Can the urge to create national or global benchmarks be so strong, that one can labour for decades for no financial reward? I don’t have it, many of us middle class Indians, who can’t look beyond their next salary cheque may not have it either.

And on top of it, the paradox is: we, who want to work for money, are poor or middle class; and those who are working for no visible money are not. Maybe this is one of those god’s mysterious ways of dispensing justice and allocating wealth.

In sum, I think it is time the media and analysts revised their opinion about Essar group, and recognize their selfless deeds for what they are worth.

 

PS: I guess this transaction and the 2 decade history of Essar Oil deserves a case study by Harvard Business School – what say?

Advertisements

Posted in Energy, Trends, What was that Again? | Tagged: , , , , , , , , | Leave a Comment »

The streets are filled with idiots, and Volkswagen cars

Posted by fairval on December 20, 2015

Janhavi Gadkar got her license back, reported media. So potentially one more id***on the road. I have found the whole JG episode beyond comprehension. Here is a lawyer (should bloody well know the law better than others), who is 35 years old (not a juvenile), and a woman (sounds sexist, but aren’t women supposed to be more law abiding?).

So this senior corporate lawyer from Reliance gets drunk with the CFO of Reliance on a Friday night and mows down a taxi at reportedly 120 kmph and kills 2 people. The car she is driving is an Audi, so nothing happens to JG. Great endorsement for safety features on an Audi, but 2 persons died.

Volkswagen seems to be wanting to put its emission controversy behind it, given the recent spate of ads. Earlier, VW was found to have put in a system of rigging emission data on some its cars. Why? Because the goal of making fast cars isn’t quite in sync with having low emissions.

The common thread between JG and VW: Speed and fast cars. Car makers all over the world, and Germany in particular, are highly focussed on speed. German cars are the epitome of luxury car industry. And what do they stand for – speed and safety. The later though is a necessary evil – if you are making a fast monster, you have to put in features to ensure that the idiot driving it doesn’t kill herself or himself (the other party be damned).

The 2 problems with the car industry – cars kill people and cars cause pollution – are a direct result of the focus on speed. This is where regulators need to step in. Several things can be done: Put in regulation to cap the top speed of cars at 80-100kmph; or put a cap on engine sizes. Noise pollution is another big evil – that should be tackled by putting in metered horns – so say 1 min of honking costs say Rs 100. To honk, you need to ‘charge’ the horn. That should cut down noise, or atleast generate revenue for the government.

Car makers will still want to sell luxury cars – but that can be via other means. Let them innovate on other features like design, entertainment, connectivity or just bling. And they can give schemes like ‘lifetime honking free’.

PS: One issue I have missed reading in the media – is JG still employed in Reliance? The CFO certainly is.

Posted in Auto, What was that Again? | Tagged: , , | Leave a Comment »