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Kannan Ramaswamy

Reliance Industries: An Emerging Player


in Global Petrochemicals and Energy
Reliance provokes extreme reactions in India. Either you are pro-Reliance or anti-Reliance.
There is nothing in between. To many, God is a poor second cousin to Dhirubhai Ambani, the
chairman of Reliance Industries Ltd. (RIL). To others, the Ambanis typify the seamy side of big
business: fixing import quotas, preempting licences, and switching share certificates. Amidst
such extremes, public drama, recrimination, and bitter controversies, RIL has built up huge capacities at extremely competitive costs, and become a force to reckon with in petrochemicals.
Shivanand Kanavi, Playing to Win, Business India, July 14-27, 1997.

Mukesh Ambani, Chairman and Managing Director of Reliance Industries Limited (RIL), had much to be proud
of in early 2010. Reliance had just commissioned what was supposed to be the worlds largest refinery well ahead
of schedule and well under cost estimates for a comparable plant in most other parts of the world. RIL had
closed the books on its fiscal year 2009-2010 with a cash balance of $4.8 billion. It was expected to generate free
cash flows in the range of $18 billion between 2011 and 2014. In unveiling the results for the year, Mukesh had
declared his intent to double the value of RIL from $80 billion to $160 billion by 2020no mean feat for an
Indian company that, until recently was largely unknown outside India. (Appendixes 1 and 2 provide a financial
snapshot of RIL, and Appendix 3 offers comparisons with industry performance benchmarks.)
RIL could easily rest on its very impressive laurels. It accounted for close to 15% of Indias exports and 6%
of overall market capitalization in the country. It was the single most widely held company in the country, with
an extraordinary track record of doubling profit every three years through most of its history. It was the worlds
largest producer of polyester fiber and yarn. It accounted for 25% of the worlds most complex refining capacity, and had become the largest global producer of clean fuels in a single location. It had a remarkable operating
efficiency record, having achieved the highest operating rate of any large refining system worldwide.
However, in some ways, these were also the worst of times. The company had already delayed its plans
for a $2 billion gas cracker that would eventually augment existing petrochemicals production capacity at its
flagship Jamnagar facility. Reliance had to cancel a tender offer for sales of naphtha from its plants because the
prices were too low to be considered economical. Petrochemical prices had fallen by 50-75% from their peak,
and were touching five-year lows. Refining margins had also followed a similar trajectory, leaving the company
exposed to the economic turbulence that was being felt across the globe. Alok Agarwal, the CFO of RIL, observed, The global recession is hurting and is the biggest problemaggravated, no doubt, by a dysfunctional
financial market.1

Reliance Industries: The Genesis


Reliance was the creation of a visionary entrepreneur, Dhirubhai Ambani. A man of very humble beginnings
from Indias western state of Gujarat, Ambani grew up in a household of four children. His father was a schoolteacher at the local village school. In his late teens, Dhirubhai left India for Aden in search of a job, following
in the footsteps of his elder brother who had found work in the British Crown Colony in Yemen. He found an
opening as a clerk at an affiliate of Burmah Shell, and moved through several jobs, including station attendant,
dispatch clerk, and manager of its petroleum filling station in Aden. His stay in Aden primed him for a career
Copyright 2011 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Kannan
Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

This document is authorized for use only in Strategy Implementation and Control-2016 by Dr. Debendra P Kar, Institute of Management Technology, Hyderabad (IMT,HYD) from August 2016 to
October 2016.

in trading. Given Adens prominence as an entrept port, Ambani had ample exposure to the realities of trading
profits and the dynamics of intermediary markets. He had leveraged many such ventures, ranging from buying
Yemeni rials that were minted in silver and melting them down into ingots for sale to London bullion traders,
to trading commodities such as rice.
In late 1958, Dhirubhai uprooted his young family from Aden and established a foothold on the urban
fringes of Bombay. He set up a general trading company called Reliance Commercial Corporation with a meager
capital of Rs.15,000 (approximately $3,150 in 1960)that, too, borrowed. Parlaying his connections in Aden,
the company traded commodities ranging from spices to sugar and everything in between. Reliance switched
its attention from spices to yarn trading on the heels of a change in government policy in the early 1960s. The
government announced a new scheme under which yarn traders who exported rayon fabric would be allowed
to import nylon fiber under very favorable terms. Soon, Dhirubhai found himself pounding the streets of
Bombay, selling synthetic yarn to textile manufacturers. Realizing that he had very little to differentiate himself
from other yarn traders, he embarked on a vertical integration strategy and managed to borrow a modest sum
of Rs. 280,000 (approximately $44,000 at the time) to establish a new spinning mill at Naroda in Gujarat. In
commenting on his motivations for launching the spinning mill venture, Dhirubhai observed, My desire was
motivated by the fact that we were not able to produce and supply a quality fabric to the export market. If I had
a ready product, then I would not be at the mercy of other units in the industry, and I could ensure the quality
of products myself.2
The focus on quality and the desire for control of the value chain were only two of the early drivers of
Reliances strategy. Dhirubhai was already distinguishing himself in key operational areas. For example, the new
spinning mill that Reliance built was roughly one-tenth the cost of a similar mill that was acquired by Reliance
competitor Aditya Birla Group. In short order, Reliance Commercial Corporation changed its name to Reliance
Textile Industries, and in its very first year it employed 70 workers and generated sales of Rs. 90 million (roughly
$12 million) and a profit of Rs. 1.3 million (roughly $175,000). When the company went public in 1977, it had
racked up sales of Rs. 700 million (roughly $80 million) and profits of Rs. 43.3 million (roughly $5 million).
This initial foray into spinning provided the opening for Reliance to enter the manufacture of synthetic
yarn fabrics based on polyester filament yarn (PFY) and polyester staple fiber (PSF). Like many of its initial integration attempts, this one was also born from changes in government policy that presented new opportunities.
The government had announced a new scheme under which companies that exported synthetic fabrics would
be allowed preferential imports of PFY and PSF.
Reliance had consistently reinvested its earnings to modernize its mills over the years. It had an unwavering
focus on adopting the best technology at the quickest pace possible. A World Bank team that visited Indian mills
in the early 1970s singled out Reliance as the only spinning mill that warranted the stamp of excellence based
on developed country standards. Despite its public ownership, Reliance seldom declared dividends, preferring
to grow its business instead. The investments were targeted at two key driversnamely, capacity increases and
technology acquisition. Indu Sheth, a former manager at Reliance during the growth years, observed, Our
expansion was dictated by the exigencies of the export markets. When there was a very high demand in the
international market for texturized and crimped fabrics, we decided to import texturizing machinery. The import entitlements that we were permitted against exports enabled us to import the most sophisticated and latest
technology from abroad.3 With constant augmentation of manufacturing capacity fueled by export demand,
Reliance accounted for over 70% of all synthetic fabric exports during the period when export incentives were
in place for such a strategy.
By the late 1970s, the preferential exports scheme had run its course, and Reliance focused its energies
on the domestic market. Most spinning mills had not upgraded technology to produce synthetic fabrics of the
quality that Reliance was able to manufacture. Reliance decided to launch its own brand of fabrics to address
this huge opportunity. It created Vimal, which means clean, spotless, and pure in Sanskrit, as the brand that
would take Reliance into retailing fabrics in India. The brand was launched with much fanfare emphasizing
the technological supremacy of Reliances mills, the world-class quality of the fabrics that were offered, and the
differentiated retail experience that the customer was assured.
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October 2016.

Sales had doubled every two years for the entire decade from 1970 to 1980, no mean feat for a newcomer.
Reliance was, however, not ready to rest on its laurels. Dhirubhai observed, Once I had successfully put up a
textile mill, I decided I must have a world-scale, fully integrated plant. All I wanted was to be competitive with
countries like Japan, Taiwan, Korea.4 The evolution to global scale required bold moves heretofore unseen by
competitors in India, and marked a quantum leap in terms of Reliances growth trajectory.

PatalgangaThe Next Step in Vertical Integration


By 1980, demand for polyester fabrics had far exceeded expectations. Consequently, the demand for raw material,
polyester filament yarn, also skyrocketed. Given the capacity constraints for manufacturing PFY, the government
opened the doors to private competition. Reliance was in a pool of 48 other companies that applied for manufacturing licenses. Most of the companies were accomplished heavyweights, but when the dust settled, Reliance
was one of the few granted a license. Industry watchers were stunned that a relative newcomer had won a license
when established players were left out in the cold.
Reminiscing about the success of Reliance in later years, Dhirubhai remarked, Between my past, the present, and the future, there is one common factor: relationship and trust. This is the foundation of our growth.
The ability to nurture relationships at all levels of government was indeed a very crucial source of competitive
advantage that Dhirubhai had carefully nourished. He observed, The most important external environment
is the government of India. Selling the idea is the most important thing and for that Id meet anybody in the
government. I am willing to salaam5 anyone. One thing you wont find in me is ego. He frequently highlighted
his humble beginnings and went out of his way to build connections with low-paid civil servants and clerks. This
sense of modesty endeared him to very powerful sources of power, ranging all the way to ministers and industry
leaders. It was widely believed that Reliance, through its informal social network within key government departments, was often privy to policy deliberations even ahead of the press.
Reliance chose Patalganga, a sleepy little village in the state of Maharashtra in western India, for its PFY
venture. The land acquired by Reliance for the project was about 20 times larger than what the actual plant required. Dhirubhais vision called for the most modern technology available so that the cost per unit of production
could be globally competitive. Speaking of his conviction regarding Reliances ability to compete on the world
stage, Dhirubhai observed, I was a major buyer of this product all over the world, and I was observing what
was going onnot only with producers in India, but also abroad. I went to a major company in the West and
saw how inefficient they were. People were not working, were having long lunch hours. The bosses, too, were
not committed, and the cost of all these inefficiencies was loaded on to the product and was being passed on to
me. I knew we could manage the business a lot better, make more money than them, and yet supply better and
cheaper products to our mills.6
The manufacture of polyester was a complicated process involving either PTA (purified terepthalic acid)
or DMT (dimethyl terepthalate), as base feedstock reacted with MEG (monoethylene glycol). Reliance was not
favorably disposed toward entering into a joint venture to secure the needed technology, and instead approached
DuPont, the chemical giant in the U.S., for the acquisition of the technology. Technology is available for the
asking in the international bazaar, so why do I need to make a foreign company my partner and give them
51%? asked Dhirubhai.7 He relied on his son, Mukesh Ambani, a chemical engineer by training, to head up
the execution team. Mukesh, 24 years old at the time, was asked to discontinue his MBA studies at Stanford and
return home to supervise the Patalganga project. The father had very high hopes for the project, and the son was
determined to come out with flying colors.
Mukesh had to learn very quickly since he had hardly any hands-on experience, despite his degree in chemical engineering. He had some support from established and experienced managers within the company, but the
core team was quite small to begin with. Insisting on adopting professional standards, he ensured that every new
recruit was professionally qualified, experienced, and vetted professionally as well. He abhorred Indias obsession
with bureaucratic systems and structures, and sought to infuse more U.S.-centric thinking in terms of day-to-day
management. He insisted on face-to-face communications and meetings within the project team, and this dictate
covered all contractors as well. In a remarkable departure from customary practice, Mukesh did not always vote
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in favor of awarding contracts to companies that bid the lowest. In many instances, the winning bids were two
or three times the cost of the lowest bids. Instead, they were primarily chosen on the basis of their execution
records. Time was deemed far more precious and Reliance wanted to execute the project ahead of schedule. The
Patalganga project was completed in 18 months, and was producing PFY in 1982. This was indeed a major accomplishment. Richard Chinman, the International Business Director of DuPont at that time, remarked that it
would have taken at least 26 months for the same project to go online in any developed country.
The rapid pace of execution had its roots in two emerging areas of project discipline that Reliance considered its forte: the ability to quantify the tasks involved in a complex project, and the ability to command massive
resources to ensure that the tasks were saturated with resources. K. K. Malhotra, then head of manufacturing,
observed, We put in the largest amount of resources that the task can absorb, without people tripping over each
other. If I had all the time in the world, I would optimize. But, given my opportunity cost of lost production,
it almost does not matter how much it costs because if I can get the production going earlier, I always come out
ahead. Only when you put the value of time in the equation do you get sound economics, and then saturation
almost always makes sense.8

From PFY to PTA: The Next Steps in the Chain


The logical next step in the chain was to manufacture PTA, a key input raw material in the production of polyester. Since local capacity was inadequate, India had to import a significant amount of the material. In setting up
a plant for manufacturing PTA, Reliance sought to not only supply its internal demand, but also fill orders for
its competitors who were engaged in producing polyester. These vertical integration strategies, however, called
for enormous capital outlays.
Dhirubhai was fuelled by his own vision of an integrated empire coupled with some very real tax benefits.
Reliance had always been a zero-tax company and had managed to plow back all its earnings into capital projects
that could be used for tax credits. Although the government changed tax laws in 1983 to ensure that all companies paid taxes on at least 30% of their profits, Reliance changed its accounting practice to soften this impact. It
began to capitalize interest on its long-term debt for the entire period of the contracted debt, thus negating the
tax impact. It had raised enormous sums of money through the equity market, and had pushed the envelope with
respect to innovation with financial instruments. For example, it issued nonconvertible debentures (a long-term
bond) that it then asserted it could convert into shares despite the blatant disparity in the underlying principles
governing these instruments. It was able to convince the Ministry of Finance, which approved this surprising
scheme. Reliance came out ahead on this scheme because its interest costs were roughly 13.5%, and even the
most generous dividend on its equity shares was very small compared to the debt servicing costs it would have
incurred. It later became a key vehicle for raising additional capital at Reliance.
In late 1985, Reliance found itself mired in several controversies and scandals, execution setbacks, and a
general wave of bad news. It found itself embroiled in a loan-for-shares scandal. National banks were accused
of colluding with RIL by lending it money against hypothecation of its nonconvertible debentures. The loans
were made out to firms that were alleged to be front companies for RIL. Although it was not illegal for banks
to loan money against shares, the appearance of impropriety was enough to fuel a witch hunt. The loans were
ostensibly advanced under the implicit premise that RIL would once again tread the well-worn path by converting
its nonconvertible debentures into shares. The government struck down this ploy and started an investigation
of the banks, which resulted in the Reserve Bank of India recalling the loans that had been made to the company
under the scheme. Meanwhile, the PTA plant was plagued with problems, and was one year behind schedulea
rare blemish on RILs execution record. In early 1986, Dhirubhai Ambani suffered a stroke and was partially
paralyzed. As a result of all these setbacks, RIL saw its operating profits fall by 80% between 1985 and 1986.
In December 1986, with their backs against the wall, RIL leaders pushed ahead to seek new sources of
capital now that the government was no longer willing to accede to the innovative schemes that RIL had been
able to get by with in the past. In a remarkable move, the company decided to go to the capital market with a
convertible offering, widely seen as a referendum on the company. The offer, valued at Rs. 5 billion (U.S. $400
million) was oversubscribed seven times and set a record for new issues in India. The PTA plant was commissioned
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in 1987. As the decade of the eighties drew to a close, the company had accomplished quite significant leaps in
its backward vertical integration strategy. It had moved all the way from its humble beginnings in yarn trading
to become a leading player in all key raw materials required to produce polyester yarns. It had also integrated
forward into the manufacture of synthetic fabrics and textile retailing.

From Chemicals to Oil Refining and Beyond: The Decade of the 1990s
The dawn of the 1990s heralded the ascent of the Ambani brothers to the helm of Reliance Industries. The
brothers did not waste any time in accelerating the growth that their father had established. In 1993, Reliance
came out with Indias biggest IPO, valued roughly at $270 million at that time. That very year, the company
was listed on the Luxembourg exchange as a GDR (Global Depository Receipt), thus becoming one of the first
Indian companies to secure capital beyond the countrys borders.
The Reliance empire began to expand in multiple directions with new plants coming up in Hazira, Patalganga, and Jamnagar. Much of the backward integration along the polyester filament yarn-textile chain was
accomplished in Patalganga through new capabilities to manufacture LAB (linear alkyl benzene) and paraxylene,
an input for manufacturing PTA. In 1992, a new complex for manufacturing monoethylene glycol, polyvinyl
chloride, ethylene oxide, and, subsequently, high-density polyethylene was established in Hazira. This plant was
the product of very careful planning and forecasting of the global price environments for feedstock and end
products. The complex was designed with a swing cracker that was capable of switching from manufacturing
HDPE to LLDPE on very short notice. It was also capable of using LNG, naptha, or gas liquids as feedstock,
thus giving it a versatile range of options to suit prevailing fuel price conditions. The goal was to be able to
respond to market changes very quickly. Appendixes 4 and 5 provide a comprehensive picture of RILs vertical
integration strategies.
Even as these major expansion efforts were under way, the government of India announced a set of economic
reforms in 1991 decontrolling a variety of industries. Sensing opportunity, Reliance established a new subsidiary,
Reliance Refineries (later changed to Reliance Petroleum), signaling its intent to enter the energy business. The
opportunity to make good on the intent to enter the oil end of the vertical chain came in 1997 when the government of India concluded that it did not have the necessary funds to invest in meeting Indias energy needs.
Reliance soon announced plans to build Indias most modern petroleum refining plant in Jamnagar in the state
of Gujarat, and started work in 1997. Built in a record time of three years, the refinery was established at a cost
of $6 billion and came on line in 1999. Spread over 5,000 acres, the complex included the refinery, plans for
petrochemicals facilities, power generation plants, Indias largest private port, and the worlds second largest oil
port. In one fell swoop, RIL had set in motion a carefully crafted strategy for competing to win in the energy
business. Comprising two trains and a Nelson complexity index9 of 11.3, the refinery could handle heavy crudes
that typically sold at a discount, thus allowing for better refining margins.
Exhibit 1. Historical Gross Refining Margins (U.S. $) for Reliance Industries v. Singapore

Source: Company Reports.

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Hital Meswani, Reliance Executive Director, observed, [Our] strategy was scoffed at in some circles because
refineries had an historic return on capital of only 6% to 8%, while cost of capital at the time was 12%. We chose
to swim against the tide. As the process was unfolding, it was obvious we had to depend on productivity and
efficiency to get adequate return and market confidence.10 The refinery was capable of processing 80 varieties of
crude oil, allowing it the flexibility to determine its input slate. With a push of the button, if gasoline shoots up
in price, we can go back and make gasoline. We created an elephant that would not only dance; it would fly.11
By 2000, Reliance commissioned the petrochemicals facilities that included the worlds largest polyester plant
(capacity of 1.4 million tpa) and a polypropylene plant (0.6 million tpa). The integration across the refinery
and its petrochemicals complex was indeed the envy of its competitors. Although many other companies and
investment consortia announced plans to set up competing refining plants, most did not reach fruition. For
example, the joint venture between Hindustan Petroleum and ExxonMobil for setting up a refinery in Punjab
fell through in 1999 when ExxonMobil pulled out of the venture.12 The company felt that the plant would be
unviable in light of the Reliance refinery at Jamnagar.
The complex at Jamnagar reflected the foresight of RILs management, and synthesized the critical lessons
learned from operations in the petrochemicals end at Patalganga. Right from conception, Reliance focused on
integration as a key advantage. For example, the contracts for the entire technology package for the first phase
were awarded to Universal Oil Products (UOP), a Honeywell company. When asked why such a decision was
made, Mukesh Ambani observed, Large benefits are going to come from clever feedstock and heat integration.
That can only happen when the right hand knows what the left hand is doing.13 This design thinking really
paid off because every output from the complex, both end products and intermediates, could be used as either
feedstock for higher value-added petrochemicals or as fuel to generate heat that could be used in other parts of
the process. Estimates at the time indicated that no more than 0.2% of the outputs from the refinery would be
wasted, an astounding feat given the 5% global average for refineries. The project was executed flawlessly and
well within the time estimates that had been established.
The five-year period following the commissioning of the first refinery at Jamnagar was punctuated by numerous important achievements, but none of them matched Jamnagar in scale. Much of the focus was instead
channeled towards establishing the operating processes and discipline needed to run existing plants at peak efficiencies. By 2004, Reliance topped the charts in terms of best operating costs, manpower cost, maintenance
cost, and plant utilization in Shells benchmarking survey.14 That same year, Platts, an industry benchmarking
group, voted Reliance as the top petrochemicals company globally. Despite the outstanding successes that the
company had achieved, Mukesh felt he had much more to accomplish.

Mukesh Ambani: Business and Management Philosophy


Widely viewed as a changemaker at Reliance, Mukesh proceeded to dismantle the feudal style of management
that was pervasive at the company in its early days. Experts came in with their notebooks on which they had
written down all the process conditions, temperatures, pressures, and carried these readings back with them. It
was all a feudal style. If we had accepted that style, we would not have grown. It was simply not a scalable model.
We tried to create an open environment. In todays language, we created SOPs and SOCs (Standard Operating Procedures, and Standard Operating Conditions) so that everybody was on the same page. We wanted an
organization where everybody contributes.15
Mukesh, like his father, believed in the power of scale as a competitive weapon. He had always favored
large-scale facilities, most of them exceeding total installed capacity in India, and at times even exceeding projected home demand. This had bred a culture that was outward focused, relying on global markets rather than
sheltered markets at home. We were clear that we had to be internationally competitive, and were passionate
about building competencies that were the best in the world even when the tariffs were very high. It was an obsession with me to beat the Taiwanese and the Koreans, who dominated the polyester business in the 1970s.16
This thinking had led Reliance to build facilities that were among the largest in the world in many product
lines such as polyester. Reliance had always favored buying the best technology available at any cost instead of
economizing for subpar technologies or partial solutions like many of its competitors had attempted to do. For
example, when its competitors were negotiating with DuPont for technology licenses in the range of $0.5 to $1
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October 2016.

million, Reliance stepped in and offered $5 million because they felt it would be worth the opportunity to work
with the best company in that field globally.
Once the deals were signed, Mukesh made sure that the project had many young engineers assigned to it,
because the intent was to capture the knowledge early in their careers and give them a quantum leap in terms
of potential future growth. One of my biggest obsessions today is that senior people must give bright 25-yearolds the opportunity to contribute meaningfully,17 said Mukesh. The company took on a distinct U.S. bias
under Mukeshs leadership. Explaining this preference, he observed, My reference points were U.S. companies.
We were hugely influenced by large U.S. chemical companies, especially DuPont. It was a very open company,
and we could take advantage of their learning. The U.S. is also a very open society. I could to go the U.S. Association of Chemical Engineers and get the standards, data, etc. It was not the Internet age, but it was easy.
It sometimes cost us money to buy what we needed, but the investment was worth it to put the right thought
process in place.18
In building its talent pool, the company had emphasized a global view by attracting professionals among
the overseas Indians who wanted to return home, seasoned professionals from leading competitors in the U.S.
and Europe, as well as the cream of the crop from Indias prestigious engineering colleges. It had established a
foundation at the Wharton School of Business to help underprivileged Indians earn an MBA there and return
to join the ranks of RIL managers. One of the central themes emphasized by Mukesh Ambani at the 2010 meeting of shareholders related to the transformation of human resources at RIL. The company had a mandate to
build a world-class human resources organization that would attract a much younger workforce (2010 average
workforce age was 41 years), nurture and develop talent with an eye on innovation, and leverage human capital
through time-tested principles around performance management and transparency, rewards and recognition,
and effective succession planning.

Oil and Gas Ventures: The E&P Story


Reliance had opportunistically positioned itself to enter the exploration and production end of the oil and gas
industry when it saw signs of liberalization of government investment policies in 1991. However, it took the
government a fairly long time to draft its new policies to license leases for exploration. In 1999, when the first
round of auctions were held, Reliance and its partner, Niko Resources of Canada, jointly bid for some of the
blocks in the Krishna Godavari basin off Indias east coast. The company hit it big in 2002 when it discovered
the largest gas field that year globally, and the largest find in India in three decades. By 2007, it had reported
over 20 finds of various sizes, mostly in gas, and had started developing and commercializing over a dozen finds.
The first major find in the K-G basin was commercialized in a record period of just over six years, compared
to global averages of nine or ten years. Production from this site was roughly 20,000 barrels of oil per day and
about 60 million cubic meters of gas per day.
Reliance was active offshore in the Arabian Sea off Indias west coast. It had commercialized production in
the Panna-Mukti and Tapti fields that were in close proximity to its petrochemicals and refining operations. Reliance was also holding leases on five coal bed methane blocks that were in the early stages. Analysts estimated that
the E&P portfolio of the company contributed roughly 25% to 30% of overall EBITDA for the company.
The company had ventured overseas in its quest for new discoveries of oil and gas. Its portfolio contained
13 blocks in six countries, ranging from Yemen to Peru and Australia and Colombia. In April 2010, Reliance
signed a joint venture agreement with Atlas Energy, a U.S. company, to access assets in the Marcellus Shale region
located in the northeastern U.S. It expected that this deal would offer access to resource potential estimated at
13.3 tcf. It also signed another joint venture agreement with Carrizo, another U.S. firm, to acquire a 60% interest
in Marcellus Shale acreage in Central and Northeast Pennsylvania. This deal would provide Reliance access to
another two tcf. By investing in natural gas rather than heavy crude, Reliance appeared to be aspiring for a niche
global major status. Touting its environmentally friendly image, Mukesh Ambani had remarked, Natural gas
is a 21st century hydrocarbon, implying a possible focus for future E&P growth.19 In October 2010, Reliance
successfully completed a U.S. bond sale to raise $1.5 billion to finance its shale acquisitions and to build a pool
of capital for additional projects.
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With the successful commencement of production of oil Exhibit 2. RILs E&P Portfolio of Reserves
and gas from multiple properties within India, Reliance seemed
set to complete the entire value chain from crude oil and gas,
all the way through higher value-added petrochemicals and
textile products. Although the integration model originally
envisioned by Dhirubhai Ambani had come to fruition, Mukesh
had a slightly different view on the integration approach. He
believed that it made better sense to operate the companys upstream holdings as a distinctly different business entity from its
downstream ventures. The way we run our businesses is that all
our businesses are independent, and upstream is a completely
new business.20 Downstream refineries did not expect to refine
Reliance crude. Given the relatively larger volume of gas in its
E&P portfolio, Reliance was keen on selling its crude oil at the
highest prices possible, given its superior quality, and buying Source: RIL and Ambit Capital Research.
challenged crudes at a discount for its downstream operations.
Maintaining a separation between upstream and downstream operations also had some important allied benefits in decision-making. One analyst observed, Reliance is known for being relentlessly efficient in executing
projects. A decision on whether to go forward with a refining venture required round-the-clock attention from
engineers for about three weeks. Approving a venture half that size in Texas took Royal Dutch Shell Plc. and
Saudi Aramco three years. Reliances efforts to produce oil and gas have been executed equally quickly. While
exploration powerhouses like Shell and ExxonMobil take about 9 to 12 years to complete a fast-track deep-water
project, Reliances latest block came online in just six years.21
Despite many landmark achievements, all was not well in the Reliance family. The Ambani brothers had
fallen out after the death of their father in 2002 and the ensuing battle for control of family holdings. The dispute
was particularly acrimonious since Dhirubhai Ambani did not leave behind a will clarifying the passage of title
to his children. The family empire was divided in 2006, with Mukesh taking control of the flagship petroleum
and textiles ventures, and Anil taking charge of the telecommunications, power generation, financial services,
and entertainment businesses. Soon after the split was formalized, the brothers were feuding again, and this
time it had to do with honoring gas supply contracts that Mukeshs firm, RIL, had signed with Anils company
that was building massive power projects. The case went all the way to Indias Supreme Court, which decided
in favor of RIL. There was a brief rapprochement between the brothers leading to the verdict, and immediately
thereafter preexisting noncompete agreements were dissolved. This gave Mukesh and RIL the right to enter
telecommunications and the power generation sectors. By mid-2010, RIL had begun making strong waves about
entering both these areas. Telecommunications had long been a pet project for Mukesh, although the pursuit
of such interests was bound to be exorbitantly expensive, given the evolution and competitive intensity that the
Indian market reflected.

A Challenging Future Beckons


At the dawn of 2010, Reliance was riding on the wave of another euphoric event, the commencement of operations at the second phase of the new refinery at Jamnagar. Termed an intelligent repeat by Hital Meswani,
Reliance Executive Director, the new facility was another world-beating operation with the most modern technology. With a Nelson Complexity Index of 14, this facility was among the most sophisticated in the world,
capable of processing some of the most challenged sour crudes. It also included an alkylation unit, under license
from ExxonMobil, allowing it to refine gasoline that could meet Euro-IV standards, thus opening the prospect
of leveraging its export capabilities. The refinery itself was built in record time of 36 months (global average is
between 60-80 months) at an estimated cost that was about 50% of what it would cost to build an equivalent
refinery elsewhere. Adjusted for refining complexity, the capital cost per complexity barrel per day was estimated
at $665, compared to the global average of $2,600.22 Having already achieved very high capacity utilization rates
in its first refinery (~98.5% versus regional Asia-Pacific average of 83.5%), the prowess of Reliance in operating
efficiency and capital discipline could now be leveraged on a much larger scale. While the company had been
historically able to achieve a significant margin differential compared to the Singapore complex refineries, these
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differentials were expected to increase further with the new refinery addition. The new Jamnagar facility was
geared to a much higher proportion of middle distillates (HSD ~40%) and value-added products such as propylenes and alkylates, products for which demand seemed to be promising. In early 2010, the government took
the first firm steps to dismantle the subsidy regime that had crippled much of the downstream businesses. Having decontrolled the crude oil end of the chain, relaxing price controls on the output side was sure to introduce
new competitive vigor. Reliance already had a chain of 1,700 gas stations that it was looking to reenergize amid
rumors that foreign players were also looking to enter the retail segment.
While some segments of the oil and gas business had started to show signs of recovery from the global
economic crisis by early 2010, there were still clear pressures of excess capacity in some pockets such as petrochemicals. (See Appendixes 6 and 7 for demand-supply projections for key chemicals.) Interestingly, however,
RIL announced at its 2010 shareholders meeting that it was planning to invest $9 billion to increase its polyester
capacity, possibly the largest capacity addition ever in that subsegment. This was in line with RILs desire to create
adequate capacity that would help it to establish a continued competitive presence in the Asia Pacific region that
was witnessing significant growth. Along similar lines, RIL was adding 1.4 million tonnes of capacity for paraxylene production at Jamnagar, in addition to building one of the largest coke gasification plants in the world. It
had signed a joint venture agreement with SIBUR, Russias largest petrochemicals company, for manufacturing
synthetic rubber at its facilities in Jamnagar. Since India was a net importer of rubber, RIL was bound to find the
joint venture lucrative. Although many of its future capital projects involved direct links with its core petroleum
business, over the years RIL had shown a preference for unrelated diversification as well.
Telecommunications, power generation, and hotels were three areas that were gaining currency as investment alternatives within the company by 2010. RIL had mounted a successful bid to acquire a significant equity
stake in East India Hotels, a company that owned many flagship properties that had consistently won global
awards for luxury travel. RIL was actively considering getting into telecommunications once more, potentially
pitting it against Anil Ambanis Reliance Infocom, the original telecom venture that was under the RIL umbrella
before the split. This move was bound to be quite expensive since most Indian players in the sector were finding
telecom margins extremely challenging, given the low average revenues per user. Power generation was on the
distant horizon, slated for possible execution in the medium term. Only time would tell whether these ventures
would be able to tangibly increase the enterprise value of the firm. The downside risk of distracting RIL from
its evolving prowess in oil, gas, and petrochemicals was nonetheless real.
The globalization of RIL, seemingly the next horizon for the company, looked tenuous. Although the
company had made some profitable forays within the familiar orbit of emerging market countries in the region
such as Indonesia and within East Africa (e.g., Kenya, Tanzania, Uganda), it had still not established a signature
project overseas. Its acquisition of GAPCO in 2007, the Tanzanian gasoline retail chain, was promoted as a
strategic investment that would allow RIL to sell its fuels in the future. However, the company has not shored
up its presence in that region since. Its acquisition of Trevira, the German polyester producer in 2004 was once
heralded as the first global entry for RIL signaling many more such acquisitions in the future. In 2009, five years
after the acquisition, Trevira filed for bankruptcy citing difficulties in competing effectively with the high-cost
structure that German labor laws necessitated. In late 2009, RIL made a bold bid to acquire LyondellBasell,
the Dutch refining and chemicals company, for $14.5 billion. The offer was rejected by the Board of Lyondell,
which instead opted to present an alternative reorganization plan to emerge from bankruptcy. Another opportunity to firmly place RIL in the global firmament failed as a consequence. Given the sparse record of successful
globalization, it remained to be seen if the phenomenal advantages that Reliance had built upon in India could
be transported to foreign markets with equal success.
As 2010 drew to a close, it was clear that Mukesh Ambani had vaulted RIL into the upper ranks of the
petrochemicals business. However, moving into the next decade, RIL faced formidable challenges. Would it be
able to sustain its competitive ability in light of the new capacities emerging the Middle East? How would it
compete against Chinese players that had access to a low cost base? Would it be able to parlay its E&P position
to become a niche player in the emerging shale gas plays? Would it be able to double enterprise value through
diversification? Only time would tell.
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Endnotes
Layak, S. 2009. Mukesh Ambanis Biggest Test Yet. Business Today, March 19.
Piramal, G. 1996. Business Maharajahs. New Delhi, India: Penguin Books.
3
Ibid.
4
Ibid.
5
To salute or genuflect.
6
Piramal.
7
Ibid.
8
Ibid.@
9
The Nelson complexity Index measures the value addition potential of key pieces of refining equipment based on factors
such the range of input crudes that the plant can refine. Higher numbers indicate ability to process more complex, sour,
and heavy crudes into higher value added products. They also indicate cost and investment intensity associated with the
refinery.
10
The House that Reliance Industries Built. 2005. Knowledge@Emory, June 1. [http://knowledge.wharton. upenn.edu/
article.cfm?articleid=1187].
11
Ibid.
12
Ranjan, A. 1999. Bleak Prospects Force Exxon to Walk Out of HPCL Bhatinda Refinery Plan. Financial Express,
February 20.
13
Kanavi, S. 1997. Reliance story: Playing to Win. Business India, July 14-27.
14
Reliance Jamnagar Refinery Tops in Shell Ranking for Energy and Loss Performance. 2004. Financial Express,
January 13.
15
Dalal, S. 2008. Mukesh Ambani: A Rare Interview to MoneyLife. www.suchetadalal.com, August 11, 2008.
16
Ibid.
17
Ibid.
18
Ibid.
19
Resnick-Ault, J. 2008. Focus: Reliance Races Upstream to E&P; No Integration Plans. Dow Jones International News,
September 23.
20
Ibid.
21
Ibid.
22
Reliance Jamnagar Refinery Will Cost Half That of Others. 2008. Indo-Asian News Service, June 11.
1
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Appendix 1. Reliance Industries LimitedFinancial Statistics


Income Statement (All dollar amounts in millions except per share amounts.)
2010
2009
2008
Revenue
45,250.6
28,989.6
34,369.0
Costs of Goods Sold
1,674.1
23,655.8
26,390.7
Gross Profit
7,371.3
5,333.8
7,978.2
Gross Profit Margin
16.30%
18.40%
23.20%
SG&A Expense
-1,241.2
1,568.2
Operating Income
4,146.5
-21,211.7
5,382.1
Operating Margin
9.20%
-15.70%
Nonoperating Income
1,765.9
24,637.2
384.4
Income Before Taxes
6,369.8
3,425.5
5,766.5
Income Taxes
945.3
559.5
874.0
Net Income After Taxes
5,424.5
2,866.0
4,892.5

2007
26,189.9
19,772.6
6,417.3
24.50%
1,347.9
3,211.3
12.30%
160.4
3,371.7
-592.1
3,963.9

2006
18,589.3
14,140.5
4,448.7
23.90%
1,381.8
2,015.9
10.80%
452.4
2,468.3
364.8
2,103.5

2,779.6
2,779.6
2,779.6
10.60%

2,103.5
2,103.5
2,103.5
11.30%

Continuing Operations
5,424.5
2,866.0
4,892.5
Total Operations
5,424.5
2,866.0
4,892.5
Total Net Income
5,424.5
2,866.0
4,892.5
Net Profit Margin
12.00%
9.90%
14.20%

Annual Balance Sheet (All dollar amounts in millions except per share amounts.)

Cash
3,085.2
4,359.7
1,121.2
Inventories
7,638.8
3,855.0
4,793.0
Other Current Assets
4,625.0
3,046.9
6,988.9
Total Current Assets
15,348.9
11,261.6
12,903.1
Net Fixed Assets
39,361.7
33,830.7
28,254.2
Other Noncurrent Assets
2,912.2
2,080.3
2,687.7
Total Assets
57,622.8
47,172.6
43,845.0

445.9
2,867.4
4,311.0
7,624.3
21,384.6
1,500.6
30,509.5

585.8
2,316.3
2,699.4
5,601.5
14,320.6
1,767.4
21,689.5

Accounts Payable
Other Current Liabilities
Total Current Liabilities
Other Noncurrent Liabilities
Total Liabilities

-9,458.3
9,458.3
16,720.4
26,178.6

1.4
7,450.3
7,451.8
16,449.4
23,901.1

2.3
6,730.5
6,732.8
14,658.7
21,391.5

1.9
4,660.0
4,661.9
9,355.8
14,017.7

1.7
2,880.1
2,881.8
7,280.2
10,162.0

Common Stock Equity


Total Equity
Shares Outstanding (mil.)

31,444.1
31,444.1
2,978.0

23,271.5
23,271.5
2,978.0

22,453.5
22,453.5
2,978.0

16,491.8
16,491.8
2,978.0

11,527.6
11,527.6
2,978.0

Source: Hoovers.

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Appendix 2. Segmental Composition of RIL Revenues*


Metric
Sales % of Total
Assets % of Total
EBIT % of Total
ROS
ROA

Petrochemicals
2010 2009 2008
22.99 34.63 36.21
17.65 20.21 23.13
42.32 37.30 37.87
15.423 13.264 14.424
18.866 13.968 17.703

Refining
2010 2009 2008
69.88 66.45 65.92
39.16 35.77 42.86
29.66 52.46 54.83
3.5558 9.7216 11.472
5.9612
11.1 13.831

E&P
2010 2009 2008
5.19
2.37
1.97
22.20 23.41 16.47
25.46 11.44
8.03
41.102 59.497 56.218
9.0264 3.698 5.2712

Numbers do not add up to 100% due to rounding. Sales are computed as a % of Net Turnover (i.e., gross revenues less
intra-company transfers).
*

Source: Company.

Appendix 3. Reliance Industries v. Competitors (2009-2010)


Metric
Gross Profit Margin
Net Profit Margin
Return on Equity
Return on Assets
ROIC
P/E Ratio
Dividends per Share

Reliance
16.29%
11.11%
18.6%
9.7%
18.6%
12.74
6.50

Industry Median
12.11%
-1.16%
-4.8%
-2.1%
-3.3%
18.76
0.80

Market Median
28.77%
5.53%
10.1%
1.5%
4.4%
26.67
0.20

Source: Hoovers

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Appendix 4. Key Milestones in the Backward Integration Sequence of Reliance Industries

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Appendix 5. RILs Integrated Product Flows

Source: Company.

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Appendix 6. Global Product Demand, and Installed Manufacturing Capacities

Product
Polypropylene
Polyethylene
Ethylene
Propylene
PVC
Benzene
Polybutadiene Rubber
Butadiene
Linear Alkyl Benzene
Polyester Staple Fiber
Polyester Filament yarn
PTA
MEG
Paraxylene

Global
Global
India
Demand Capacity Demand
(MMT) (MMT) (MMT)
44.4
55.5
66.0
84.0
115.0
145.0
71.2
100
32.4
45
1.80
37
58
1.68
2.2
9.4
11
0.11
3.0
3.45
0.80
20.0
1.90
3.3
17
21
1.4
22
28
2.0

Reliance
Reliance
Capacity Production
(MT)
(MT)
2,685,200 2,398,598
1,057,906
1,883,400
759,800
28,095
625,000
624,018
730,000
662,254
74,000
72,894
419,000
182,400
162,813
741,612
627,857
822,275
796,033
2,050,000
610,787
733,400
301,509
1,856,000
514,938

Source: CMAI, and Company data.

Appendix 7. Global Ethylene Capacity Additions in 2010


Region
NE Asia
NE Asia
SE Asia
SE Asia
India
Middle East
NE Asia
SE Asia
Middle East
TOTAL

Company
Panjini Ethylene
Sinopec/Sabic
PTT Polyethylene
Shell Chemical
Indian Oil
RLOC
ZRCC
MOC
Morvind PC

Capacity (000 KTA)


450
1000
1000
800
857
1300
1000
900
500
7,807

Source: CMAI, and Company data.

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