Wednesday, December 28, 2011

What to expect from Ambani brothers in 2012

Reliance Industries needs to highlight new ambition for profits to grow, while Reliance Communication needs RIL to emerge stronger in 2012.

As Ambani brothers dance to the tune of garba music, many Reliance Industries and Anil Dhirubhai Ambani Group investors would have started to build high expectations from the new year.

On Tuesday, when trading began, the BSE Sensex stayed flat. Reliance Communications shares jumped 5 per cent. No other Anil Dhirubhai Ambani Group company share rose so much. Over the past one week, Reliance Communication shares have surged 17 per cent. The BSE Sensex rose 3.3 per cent during the same period.

The trading pattern of the day and the week indicates that the street has already begun to build that anticipation. They expect something to emerge out of the family get-together at Chorwad, Gujarat, the native place of the late Dhirubhai Ambani.

Analysts and bankers tracking the group are hesitant to speak on-record.

However, it is very clear that Reliance Industries and Reliance Communications could explore synergies for rolling out the 4G wireless broadband plan in 2012.

Mukesh Ambani knows the RCom network. After all, he set it up.

Now, it makes sense to utilise the infrastructure already created to offer 4G broadband services. Mukesh Ambani acquired a company Infotel in June 2010 that won the nationwide licence for 2.3 gigahertz broadband wireless access spectrum. This allows RIL to offer 4G broadband services nationwide.

From the Reliance Communications standpoint, this would be a key transaction. The company has in the past tried selling passive infrastructure to companies like Global Tele or GTL and private equity investors. It has not worked out. The balance sheet of Reliance Communication would be relieved of a significant debt burden if any such deal materialises. As of September 2011, the company had debt to the tune of Rs 32,000 crore.
Previous reports say that Reliance Communication was looking to find a strategic partner for the business and a buyer for the passive infrastructure business for over 18 months now. For Reliance Communication, Reliance Industries is the strategic partner or buyer it is looking for.

We cannot speculate about the scope of the deal between Reliance Industries and Reliance Communication. Yet, one can say that in 2012, Reliance Communication could emerge stronger.

Reliance Industries

It is not enough merely being a strategic partner to Reliance Communications in 2012 for Mukesh Ambani’s Reliance Industries.

The street really expects much more from the big brother.

The company is likely to sit on a large cash pile over the next two years with no significant expansion plans in any business. Reliance Industries in 2012 could make better profits than estimated earlier. The fall in the rupee is likely to benefit the company.

According to Kotak Securities estimates, when the US dollar gains a rupee, it boosts Reliance Industries earnings per share by about 3 per cent over the next two years. This means the company is expected to generate more cash. Kotak Securities puts the free cash flow figure at Rs 76,100 crore over the next two years.

The stock market though is concerned about the end-use of this cash pile. The street does not expect the company to deploy the cash pile either into existing businesses in a big way. The company could make some acquisitions of energy assets outside India. The company invested over Rs 12,000 crore in shale gas assets in US.

The other issue is that Reliance Industries has not yet outlined the long-term vision for new businesses like retail or telecom. Hence, the street does not expect the two new businesses to absorb that scale of capital.

This is not such a familiar situation for Reliance Industries as the company has always been in a rapid expansion mode over the years and utilised capital effectively.

In 2012, the street would be interested to the vision for new businesses like retail and telecom.

A higher dividend per share would be rewarding for shareholders. The company has typically followed a conservative dividend policy. However, with no significant use of cash, any buyback of shares or dividend would go a long way in boosting the investor sentiment in 2012.