Reliance: Caution Ahead!

Can u rely of reliance? This is the question many people in the Market are starting to ask. Reliance has always been the stock in limelight, starting from the days of late Dhirubhai Ambani. Then the war between the brothers and excessive marketing made reliance a household name. People started speculating on whether Mukesh Ambani controlled business would be more profitable than ADAG (Anil's Cos) of vice-versa. But it was very shocking to see both brothers doing very well, at least in the stock market.

Fortune Favors the Brave!

Both brothers have consistently featured in the Fortune Magazine list of the richest people in the world. And according to the march 07 figures Mukesh was 12th richest and brother Anil at around 17th. All this changed with the stock market bull run. Now according to times Mukesh is the Fourth richest person in the world with $ 50 billion (Sept figures) just behind Warren Buffet $ 52 billion and Bill gates $ 57 billion and Carlos Slim $ 58 Billion (Aug figures). The combined wealth of the brothers (/family) stands at $ 80 billion, making them the richest family in the world. Amazingly Both brothers achieved this feat (journey beyond $ 1 billion) in only few years after the death of legendary Dhirubhai. Now the challenge for them is to stay in the top spot for a long time, remember Amiz Premji of Wipro, he became 3rd richest and was thrown out of position shortly within months.

Bubble?

I was amazed to see six Reliance companies in the top 10 companies by turnover in the NSE site. When i probed more i found out that earlier this year only two were present in a similar list. (see the chart below or click on the links for more detail on Year ending Mar 07 ; and Sept figures).



The recent surge in Reliance is making me worried about the valuation of these companies and the overall market (bec of high weight age of Reliance in stock market). Just few days ago one of my friend was justifying R Energy's PE of 40! I just couldn't belive that this was a power company. All this makes me believe that Reliance is cooking up something. Or maybe this is just a beginning of another era! This will be the difference between :

Reliance = Rely + alliance and
Reliance = Real + lying + alliance

Bharati Q4, Earnings

Bharti Airtel Ltd. came up with its latest 4th Quarter figures, beating the forecasts. India became the world’s fastest growing telecom market. Now it boasts of more than 150 million subscribers, which shows that still only 15% of the country’s population is covered. The projections made by Sunil Mittal look forward to tripling of the total customer base within five years. Which means that around half of the population would be using mobiles.

Bharati which is the telecom leader in India boasts a subscriber base of 39.02 million as on March 07 and has become one of the largest companies in India. It has the third highest market capitalization of more than $40 billion. This means that the company has a total weight of close to 7.5% in NSE Nifty compared to around 10% weight of both ONGC and RIL. It is interesting to note that RCOM (Reliance Communication) has a weight of 4%.

Bharti has relied on GSM technology for its growth compare to RCOM which relies on rival CDMA technology. The battle between these two companies extends from customer base to technology. With introduction of 3G in India the market place will become complex. Already Anil Ambani has shown interest in the rival GSM technology on a limited scale to leverage on 3G techonology.

Bharti for long has maintained a good lead over the competitors. It has maintained its position as a favorite for foreign investors. Currently SingTel (South East Asia’s largest Tel. Comp) holds around 30.8% of the company. Before Vodafone, world’s largest telecom company also held a strategic 10% stake in the company.

Bharti is seeking more efficiency by outsourcing majority of its telecom operations. Bharti’s share rose 21.4% between January and March this year compare with 5.2% in the benchmark index. Bharti’s shares were down 2% at around Rs. 844 compared to the 1.6% drop in the index.

Inefficiency of Indian Companies !

The Net profit of Indian companies is lower 40% as compared to other MNC companies

43%. The figures were of top 100 Indian and MNC companies. This might only look like

a marginal thing. But it is important to keep in mind that the aggregate turnover of

an sample MNC company has increased 22.9% as compared to 34.5% for Indian companies.

This could be attributed to inefficiency of the Indian companies. Mainly the input

costs of the companies have gone up. For Reliance the growth in profits was limited

to only 10% dispite of a 38% increase in turnover. High crude oil price was the main

cause, the aggregate costs have risen by 42%.

Tata steel also showed similar performance with 14.5% increase in the expenditure

and only 4.4% increase in the net profits. The MNC's have fine tuned their cost

management. Their turnover has not inceased that much compared to the indian

companies. This could be signs of inefficiency of the Indian companies. The interest

liability of Indian companies has declined compared to last year.

It important to notice that Indian companies are taking more debt to finance their

activites. TATA steel for example is planning to finance its Corus deal using debt and Reliance also trying to raise money

through foriegn debt market. In future rising interest costs on borrowings would

bring down the net profit growth even more. With Sensex now at all time high and valuations on stretch it is

very important to pick companies with steady growth in future.