For those who follow the sensex, things are getting curiouser and curiouser. The key 30-share index has shot up by more than 50 per cent over the past year.
But since August 2007, when the sensex leapfrogged within two months from 17,000 to 20,000, the skewed nature of the rise has become evident.
Nearly 70 per cent of that 3,000-point rise was on account of the major Ambani stocks — Reliance Industries and L&T (both Mukesh Ambani companies) and Reliance Communications and Reliance Energy (Anil Ambani firms). Seventeen of the 30 sensex stocks did not go up at all or fell during this period.
So what’s going on? The searing rivalry between the two Ambani siblings has had at least one happy consequence: creating enormous public shareholder wealth.
Between them, Mukesh and Anil are now worth nearly $100 billion (Rs3,93,000 crore). Controversies continue to swirl around the unprecedented spurt in the Ambani stocks, especially Reliance Industrial Infrastructure (Mukesh) and Reliance Natural Resources (Anil) which are awaiting spin-off largesse from their parent firms.>
Hence their steep price rise as investors and others plant their stake early in the hope of a rich future harvest.
But what of Reliance Industries itself? Does it justify its market valuation of over Rs4,00,000 crore? RIL has a relatively high price-earnings (P/E) ratio of nearly 30. That figure hides more than it reveals.
Reliance Industries’ cash profit in 2007-08 is likely to be well over Rs20,000 crore, giving RIL a cash EPS of around Rs200 and a cash P/E of 14 (at a price of Rs2,800 per share). Suddenly, RIL begins to look cheap at its current price.
Add three more ingredients. First, the undeclared value of RIL’s oil and gas reserves in the Krishna-Godavari (KG) basin. These are significant future assets.
Second, the unstated full value of RIL’s SEZs around the country - not only the land value but its revenue potential. Third, RIL’s retail rollout.
With several retail verticals (food, décor, jewellery, electronics) underway, RIL’s retail business will add to revenues as well as profits in the next few years.
With oil prices likely to cross $100 a barrel and stay above three figures, RIL’s refining margins are rising every day.
When Reliance Petroleum’s 27 metric tonnes-a-year refinery at Jamnagar comes on stream in December 2008, RIL-RPL will be among the biggest refiners in the world at a time when refineries are closing down in the West, leading to an acute global refining capacity shortage.
(That is why RPL already has a higher market value than Infosys Technologies and RIL’s own market value is 50 per cent higher than the dollar-hit Infosys, Wipro and TCS put together).
What about Anil’s companies? The younger Ambani’s wealth is derived largely from his 65 per cent holding in Reliance Communications.
Anil’s entrepreneurial skills have enabled his companies to generate exceptional shareholder value. Reliance Communications, Reliance Energy, Reliance Capital (which one day will inevitably be a major bank) and Adlabs have all outperformed the sensex by a wide margin.
There is little doubt that Anil’s focus on energy, infrastructure, finance, telecom and media will create significant future wealth for his shareholders.
Taken together, the market value of Mukesh’s and Anil’s companies is now over Rs9,00,000 crore or nearly 15 per cent of the BSE’s entire market cap and 25 per cent of India’s total GDP.
And yet, this could be only the beginning of the Ambani saga. India’s GDP is growing at nearly 9 per cent annually. Corporate earnings are increasing by 20 percent a year.
You can count on both Reliance groups beating that broad corporate earnings growth rate. Significantly, as the sensex turned volatile last week, the Reliance basket held up.
That indeed is why the sensex has remained (still) largely immune to America’s sub-prime mortgage meltdown.
