A large family fortune starts a risky transition

The flagship of Asia's richest tycoon is looking a tad overburdened with businesses that are mature enough to be cast off on their own. Successful public floats of telecom and retail units will do more than make Mukesh Ambani a centi-billionaire — they may well determine the hold of the family-run conglomerate on India's broader economy when control passes to the next generation.

That transition could arrive by 2028. At Reliance Industries Ltd.'s annual general meeting Monday, the 66-year-old announced that his three children would be joining the board, even as he continues as chairman and managing director for five more years.

Reliance's sway has grown following a $150 billion investment spree over the past decade. It now controls 15% of the total fixed capital deployed at India's top 300 nonfinancial firms, employs 7% of the workforce and garners 10% of their combined EBITDA. Reliance is no longer just a corporate, but "a precious Indian institution," Ambani said.

The market, however, wants to see some of that preciousness translate into a higher share price. After recently spinning off a new consumer-finance venture worth $16 billion, the enterprise is valued at $232 billion, including net debt. 

Macquarie Group Ltd. analysts downgraded the stock to "underperform" last month. A premium for retail and telecom may already be embedded in the share price, and investors may be assessing new energy — the group's next big bet — at around $20 billion, they wrote.

That's already rich for an unproven thesis. Reliance wants to put up gigafactories to manufacture solar modules from sand, low-cost wind turbines using carbon fibre from its own plants, batteries powered by lithium and sodium ions, and electrolyzers to split water into hydrogen and oxygen. Considering that these plans are still in progress, the $20 billion implied valuation carries a lot of respect for Ambani's reputation for project execution, chops the younger generation is yet to demonstrate.

In his address, Ambani promised "a new and virtuous multi-decade value creation cycle defined by faster growth, higher revenues, better margins and increased EBITDA," significantly enhancing the earnings multiples of each of Reliance's businesses. This is where the market seems to be less sanguine than the billionaire. 

The price-to-earnings ratio dipped below 25 after the chairman's speech. It had soared well past 30 when Ambani was raising billions of dollars of equity from global investors including Google's parent Alphabet Inc. and Meta Platforms Inc. (then Facebook) during the Covid-19 lockdown.

The focus on leadership succession can't detract from the need to validate bets that Ambani has himself made so far, particularly in telecom and retail. Through those two capital-guzzling gambles (and renewable energy, more recently), he has sought to transform the petrochemicals empire his dad, Dhirubhai, left him.

However, instead of indicating a timeframe for much-awaited initial public offerings, the tycoon talked of things that would cost yet more money. The plans include 2,000 megawatts of artificial intelligence-ready computing capacity, fixed-wireless broadband for 200 million Indian homes, expansion of a fledgling consumer-goods franchise to other parts of Asia and Africa, global leadership in carbon fibre, and more investment in gas exploration. 

These are in addition to the capital required for 100 gigawatts of clean-energy generation by 2030 and a nationwide 5G rollout by December.  

For now, India's most valuable public firm is trying to establish the success of its makeover in the private market; such as by getting Qatar's sovereign wealth fund to cough up $1 billion for 1% of Reliance Retail recently. A $100 billion price tag is nearly double what private equity paid for it during the September 2020 fundraising round. 

Had it been listed, Reliance Retail would have ranked among the Top 4 companies in India and the Top 10 retailers globally, Ambani said at the annual general meeting. Investors, however, are too hungry to be satisfied only by the aroma. Instead of taking the lid off the pot only to stir it some more, why not serve them the dish? 

That way, the stock market also gets a chance to weigh the next generation. At 31, the twins Akash and Isha Ambani are a decade older than their dad when he joined the Reliance board in 1977. They are no longer too young to be helming publicly traded digital and retail enterprises, respectively. 

The complex new-energy unit, overseen by Anant, their 28-year-old sibling, will need five to 10 years before it's IPO-ready. At least for the next five years, the millennial leaders will have their father's stewardship of Reliance's investment-grade Baa2 credit rating, which is a notch higher than Moody's Investors Service's assessment for the Indian government. There's plenty of room for youthful mistakes.

It helps the group that rival Gautam Adani, who had overtaken Ambani last year in global wealth rankings, has lost his footing after a massive short-seller attack in January. While Adani is still highly acquisitive, he may be narrowing the field of his ambition to infrastructure and utilities, leaving the Ambani family free to grow in areas that have more to do with consumer demand in the world's most populous nation. From telecom and media to retailing and owning brands,  these opportunities are large in both number and scope.

Then there's the whole new area of payments, lending, asset management and insurance. Jio Financial Services Ltd.'s recent stock-market listing hasn't unlocked value — it has simply given Reliance shareholders a stake in a shadow bank that will now get created from scratch. Until its strategies pan out, a large part of the financial venture's market capitalization will come from its stake in the main firm, where it may be subject to a typical, 20% holding company discount.

A smooth transition to the next generation is important. It will help preserve family wealth and the conglomerate's clout in India. But the telecom and retail IPOs need to arrive soon. Otherwise, excess baggage on the mothership could riddle it with a permanent drag.  

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. 

Disclaimer: This article first appeared on Bloomberg and was published by a special syndication arrangement.