Reliance Strategy

Business Strategy

15th September

Dr. Harshad Manakd  

Lehman has filed Bankruptcy

Bank of America and Merril Lynch deal is almost final. Today when the markets open , there will  be dios in the market. Bse in down by 750 points down. Overall environment is in PANIC and every other market is falling. Bank AM may loose out and it will make a negative impact.

USA has to somehow saved this. AIG has already asking for 40 billion $ which signals that market e signals are dangerous. Hundreds of jobs are immediately lost. The prognosis is not very god. The situation is bad.

Reliance strategy

1. Here was a man "Dhirubhai" who was almost no body. Wen over to eden an works at the petrol pump and worked as a distributor and remained over there for almost 8-9 years. He made a statement that one day I will open my company. Came back to India in 1969 and dabbled into spices and then textile as a wholesaler at mujijeo cotton exchange. He was into the wholesale market. The Parsi gentleman who refuses his admission was NUSLI WADIA. When he plans to enter into systematic manufacturing of textile. Wadia has the backing of TATA's.  They kept on fighting with them in 1980. He established VIMAL and brought new IPO. He was within the close circle of Indira Gandhi.

1. Whether to cultivating a politicians is ethical or not. Businessmans and politicians were arms in gloves. Today the same Ambani's were vying for the same thing. Suddenly Mukesh Ambani found …the price they have asked for..to better support to Anil Ambani.

1. Dhirubhai supported Mrs. Gandhi. He was a matriculate from Gujrati School. But he embodied nursery rhyme. Classical case of Vertical Integration. First he sold the cloth. Then he make the cloth , then chemicals, then petrochemical and then Refnery(The feed stocks of the petrochemical). He went in an put in the the Refinery. Reliance petroleum is the

1. How could he get the success. He created the stock market culture and he sold shares and trust to people. People were ready to give anything that he wants. He was playing a very peculiar way in a different manner. Chryssller was on the verge of the Bankruptcy. In 1962.

1. The oil price went to 38$ and Chrysller was on the verge of collapse. Because on the other side there was FORD. One find morning FORD called CEO "LE aya cocha". He was surprised and ford was arrogant enough to say on the record that I don’t like your face and he just walked out of the gate and walked into Chryslller and accepted as CEO with the salary of 1 $. HE was a Democrat and had good links with the Jimy  Carter.

1. Chrysller paid a beautiful of the Debt Equity game. Dhirubhai played this Debt-Equity game much smarter. In 1980's in India the long term funding was into the Public sector. IDBI , ICICI and IFCI were the major lender for their capital along with the states corporation. The Debt -Equity ws in the ratio o f 2:1. Every time he raise 100 as equity and go to the bank and asked 200 from bank. Then again when he bypassed the limited of debt , he again approached shareholders as convertible debentures. But with the options that after 18-24 months you have an options to convert into the shares. So you have the choice of converting it into share.s and reaised 300 rs from public and debt equity ratio rose frm 5:1. Ambani family had only 10-12 % holding. Dhirubhai used to give always higher dividend and always kept higher prices and jacked up the prices and kept the shareholders happy.

1. As a supplier , u wont be able to get money for 9 months. Hence they offered shares  to them, was a big debtor but reliance was always cahed out but always paid in the form of shares. Afte r18 months , Shareholders used to receive a letter from the sahreholders to convert it into the shares. They were very willngly converted into shares. Hence debt of 300 become shares. Hence Debt 200 + 600 and Equity 100 + 300 and this chain reaction continues.

1. Everybody was happy and he manipulated market very well. And there was a Swing. Between 1980-1988 reliance issued 10 series of convertible shares and amassing public money and kept on investing this money. He invests the money at the plant in Baroda (Vimal Textile). So What he would do , He says he wants to project A. He will money making proposition.. Then A is on. But the money collected for A was spent else where. Hence he went ot the market and told that he wll make now. He made a money lending cycle , Reliance is a Finance and Project company. w/o being over run. Then Naroda was on and then to complete naroda ,he made huge plant for reliance. He was really adding the equity and thereby increasing the borrowing capacity. Huge fundflow for the pant. He always invest into the best technology. He build a plant of capacityof 10 k ton where the capacityof the country was 6k ton.

1. His Thinking ws what would be the demand was 5 here hence.The Mobile is cheaper because of reliance. They said they are going to have 1 crore subscribers and ordered it to NOKIA. That’s what reliance did and had 60 lakhs connection and suffered lossed. But recovered fast and are in the race with the Bharti. Now we have 20 Crore connection. This market has been created by Reliance. Aditya Birla ..Dhirubhai at 27 then 60 milion ton refineries. Bharti laid 12000 km OFC and Reliance laid down 60,000 km OFC. Reliance strategy was scale. In the sector you are in , It’s a number of hits that matters. The marginal cost is very little. When you got the first netscape , how much of the second copy cost. An dthe CD cost have come down.

1. Economics of IT is economics of numbers. Dhirubhai understood this very quickly. He said the extra cost wont be that much and the incremental cost was only 40%. That’s y he talked about world scale. So he made the yarn factory and it was talking time. He planned to make chemical along with yarn at Patalgana. Only SPIC and IPCL were the only 2 companies making petrochemicals. IPCL was a great company always operated at 100% capacity.

1. Patalganga was into operation and found that the technology (DUPONT technology). The quality of the product was very good. And they asked the price. They said why do you want to worry about the price. They knocked out the IPCL price from various place to place. They offer 1000re discount per ton ..against the previous invoice of IPCL. They captured 40% market share. The CEO of the IPCL failed to change the prices and by one stoke of genius , They got the IPCL prices. They got to know how they were operating. IPCL dod a mistake of going close to Dhirubhai. They again put up a plant near patalganga at NAGOTHANA.

1. The engineers of patalganga and naothana had same places. Reliance directly recruited people from IPCL in the MARIO_PUXO style. The offer you can t  reject. They always went for the higher salary and steal people. The same way Americans did. Hence IPCL (all Ppl) went to Reliance. Then 5 years back, Reliance took over IPCL and is been merged totally.

1. IPCL has over employment and merger problems would occur. JP Morgan didn't recruit 1 out of 18000 employees and all went home in this game. Reliance went into an agreement and said there would be no retrenchment. The other party kept quiet. They had 12000 plant and said such a plant don’t need more than 6000 employees. Hence reliance invested another 50o crore and no recuitment. Today IPCL plant is as effective as patalganaga plant. They just double the investment. They built patalganga. They knocked out th market share. In 1987 ,There were major floods in Maharstra. Patalganga is a river and flooded Reliance and Bombay Dyeing on both the sides. Mukesh was at patal Ganga and couldn tcontact dhirubhai. In 12 0 clock midnigh t, He shouted that these guys at DUPONT are a big hurdle. They said this plant wont survive for more than year. He said tom when the water recede , I will receive. He said they would be very happy to go. Dupont engineers were thrown back. He said the scrap the damaged plant and replace the plant with double capacity. And didn’t paid import duty. That’s how they build. The plant was recovered in 20 days. Gurumurthy found that they had imported and for 6 years they didn’t paid an import duty and paid 250  crore as penalty. At that time he got double capacity in 20 days and Bombay Dyeing didn’t start for 2 years. They were making the same product but were using different technology.

1. GOI , Increased import Duty against Wadias raw material. What happen after was…..Dhirubhai ..announced to make another plant RPCL in Hazira(a plant of bigger size) and public issue financed it. Now Hazira started getting built. Patalganga had money to hazira but there was a spoilsport. FM Mr. VP Singh. He was the FM and brought a very peculiar provision of deemed dividend. He brough ta tax that if one company gives money to the sister company , it would be deemed at dividend and required to give 47% tax. Patal ganga had money and could nt transfering funds to feed Hazira. As Hazira had to be built. That was the time , Banks were on the hight for the mutual fund. One bank that was nt established was BOB. All the Chief of Banks were dhirubhai friends. He advised BOB to start mutual fund. U need some good securities and BOB went over to LIC and GIC. LIC is a very power cash company and very efficient. LIC was holdin ghuge portfolio of its own. He said we want a particular security called L&T. They were holding 54% holdin gof L&T.. BOB asked for 12 % and sold to market price to BOB. BOB mutual purchased it from LIC and transferred to trishna investment firem (DHIRUBHAI AMBANI). By Virtue of 12  %, dhirubhai became the chairman and he took all of Mukesh * Anil to the borad and passed a resolution. That L&T will build HAZIRA on the Deferred Payment basis.L&T wentfor its own public issue for 8400 crore and Signed Dhirubhai chairman. It was a Reliance company hence it was oversubscribed due to Dhirubhai Ambani.

1. One thing DhiruBhai didn’t anticipated that ….Rajiv Gandhi lost in 1990 and same VP Singh become Pm and Mr. Madhu Dandwate became Fm. They found that public sector companies are holding 60% and Relaicne only 12 % but ..he is chairman. They asked for EGM and stalled this plan. Dhirubhai knew that …it wont possible. Hence made peace with Governement and cancelled the resolution at the board level. NO Hazira expansion and IPO money cont be used.

1. L&T was already sitting on the 400 crore as the initial money. They didn’t asked for the further money. And gave all people fully paid share. Henc ethey went for the Cement Industry to utilise the Idle money. They did very good business and 33% of L&T revenue came from cement. BCG advised larsen to Exit from the cement business. Birla came into picture and Century bought 12 % stake from AMBANI and made huge pile of L&T money.

1. That didn't prevent dhirubhai , within 15 days , Lawyers werein the court fo rthe merger of RIL and RPL and there was nothing that governemtn couldnot stopped them t merger. There was a big elaaoboo…but overwhelmingly they voted for the merger. Once it become one entity , there was nothing to stop them to use the surplus money. Hazira plant went in full steam.Still it was short by 600 crores. Henc ethey float 2 new comoany RRPL , RPEL for 300 cr each . Which were oversubscribed and took money. And wthin 1 years , both were merged in the RIL fold. They have got the information fom within the government in Advance for borroing overseas. They were ready with due dilligenc e and went for the GDR. It tool 9 months fo rAditya biral to go fo rGDR.

1. Ambani was on the paralytic attack adnwas badly hit physically. From 1990 to 2004 when he was died , he was working at 25% of his capacity. This happened in the march, Dhirubhai with the speech thrapist went to switzlerland at practised 2 min speech for 6 hrs (2 months) for the Kukerage Stadium AGM. Came the AGM days , Dhirubhai was on the Dias and here was dhirubhai was sittng out there and Mukesh walked up to him and He refused to receive his hand and delivered 2 minutes speech and audience was absolutely in GAGA.

1. Had he not given Speech , Relaianc ewould have collapsed. His detractors would have taken hell out of relaince.

India's world class corporations

1. Gita Pirama said , in 1990 Dhirubhai said "Future lies in Communication". While diging the OFC and got into the partnership with railways. 20 meters on the either side of the track …..was of Reliance. They had blanket permission all over the country. Once those 60,000 was in the place. Reliance entwined around Anil's finger. Its all r going to go to Relaince. Today Bharti buys OFC's from reliance. Mukesh laid 4000 km of pipeline. And that pipeline is used for distribution for IOC , BPCL and ONGC. Now GOVT is  paying. After the brothers split , first purchase of ADAG was ADLABS. But a very smart move,  Hritik. Recently they bought ND studios and paid 150 crores. An dAnil said this studio will rival any hollywood studio. Narendra Desai got 50% stake int h venture and better than Ramoji. And went into the agreemtn with Speilberg.

1. Piracy is an issue. But once the infocom is ready (matter is few month) the movie maker will make one DVD and that one DVD will shpw more than 1000 shows every day. Only 50% of the OFC's will be used. He is going to control 50% DATA traffic of the country.

1. Anil is doing has a synergy in what he is doing. RIL has straegised ………MUDRA ADVERTISING (A G KRISHNAMUrthy)