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Business Commentary/Harshad Mehta

Admiring Reliance for changing its corporate image

A number of observers, analysts and media writers have applauded the corporate performance of Reliance Industries at a time when the economic recession would have led us to believe that only the reverse was possible. I join in the applause, but for a different reason.

There are quite a few reasons to admire Reliance. Let me trot these out briefly: Reliance's ability to sustain high growth rates, its ability to digest criticism of its political management and move ahead, its ability to professionalise its management despite a family-run structure at the top, its ability to be a pioneer in the methods of financing its mega projects, its success at erecting competitive productive assets of global capacity and its ability to stay ahead at a time when most of its competitors are gradually growing sick. One feature sums Reliance better than all these: its market capitalisation is considerably higher than that of all its competitors put together (I leave IPCL and Bombay Dyeing out of this calculation).

But if there was one area in which Reliance has lagged for many years, it is in the price/earnings ratio. For a company that most of us are convinced is globally competitive, the price earnings ratio that the market is willing to assign Reliance is slightly unfair. Ask any analyst as to why this is happening and he will run through the reason with you: that the management cannot be trusted -- and will cite the example of a few years ago when the Ambanis promised the foreign institutional investors that there would be no dilution of equity, and then promptly placed fresh equity a month later.

Since perception rules the market more than fundamentals, the Reliance stock dropped out of influential 'buy lists'. FIIs began to get the feeling that this was too big and too powerful (and possibly too whimsical) a company for them to invest safely in. The result: Reliance slipped on the p/e charts. The stock actually dropped to a low of Rs 165 at the peak of the share transfer controversy.

But there has been an interesting change at Reliance thereafter. I admire it for the way it has gone about repairing the damage done to its image with a highly improved attitude towards corporate communications. A number of companies would have courted the media only; Reliance has gone several steps ahead. The biggest advertisement of its intention and credibility comes from a simple fact: Reliance is one of the first companies in this country -- definitely the first among the big-caps -- to announce its corporate results, be it the annual or half-yearly. That it delivers its numbers within the first 15 days after the end of the accounting period indicates not only the quality of its commitment to its shareowners but also the quality of its MIS and accounting systems.

I have asked many corporates why they cannot do the same. The answers amaze me: some say their companies run multiple operations, and collation of information 'takes time', others excuse themselves by saying that their operations are 'too complex', some confess that they are spread across many locations so audits take longer time, while -- and here I might surprise you -- there are some who have the audacity to say that they do not have enough people to prepare the accounts or that they have not made up their mind how to treat certain items in the accounts. Just about any excuse will do, resulting in inexcusable delays -- I know of an instance this year when one company presented audited accounts eight months after the financial year had ended!

What makes Reliance an interesting example to study is that the company faces all the constraints that others would rather use as excuses for a late results announcement. It is a large company, it is multi-locational, it is multi-product. These are the same reasons why come of the big-caps lag behind others in the presentation of their accounts. So if Reliance is prompt in making its results public, I get the right signals as an investor: that its MIS is in good shape, but more importantly that the company cares enough to be the first off the blocks. Some of the supposedly more 'professional' multinationals in this country are much slower in achieving the same.

What one finds admirable about Reliance is that it converted its shortcomings into an opportunity. Faced with criticism that its operations were opaque and nobody could understand where the profits were coming from, Reliance embarked on the exercise of putting more information into its annual report than most companies would care to. To counter the criticism that its profits were artificial, Reliance enlisted international auditors to certify that its compliance with international accounting norms was fair and credible.

This year, Reliance went a couple of steps further. Whereas most investors expected Reliance to announce a bonus issue in the ratio 2:5, Reliance stunned the market by announcing one free share for every one held. It held a media conference immediately after the results were announced and followed it up with a separate one for brokers and analysts. A few days later Reliance became the first Indian company to get listed on the New York Stock Exchange.

All this is indicative of a cultural change within the company. There was a time when most investors felt that the management was insensitive to investor welfare and shareholder value. As a result, Reliance was degraded to a traders's counter. Nobody would put his father's pension money into Reliance stock, irrespective of the fact that Reliance would continue to grow as a company.

I would like to think that this is changing. And that this is largely due to the right sounds emerging from within the company. The chairman of Reliance made a statement in the annual report two years ago that equity dilution through private placements would cease, that shareholder value creation would be a predominant concern and objective.

More recently, the management categorically stated that dividend payout (in percentage terms) even after the equity doubles following the bonus issue. This kind of statements -- which any shareholder friendly management should have made anyway -- would not have been expected of Reliance earlier. It surprises me that most Indian managements do not think like this even today.

Reliance is merely a test case. I find other interesting things happening. I find Infosys reporting its results within the first seven days of the next accounting period; the company mails a quarterly performance review document to its shareholders. In fact, I find quite a few companies (Krebs Biochemicals being a small but attractive example) mailing quarterly results. I find a company like Balrampur Chini Mills mailing intangibles accounts with the normal financial accounts; I find Cheminor Drugs producing one of the most exhaustive annual reports this country has ever seen -- despite reporting a sharp drop in profits. I find a staid corporate like Great Eastern Shipping turning out a very informative annual report on shipping for 1996-97; I find a company like BPL valuing its brand, and I find companies like Krishna Filaments (with absolutely no intention of raising international capital) making disclosures in substantial compliance with form 10-K of the Securities Exchange Commission, USA.

All companies floundering at p/e ratios of one and two, and blaming their woes on insensitive investors, should emulate some of the companies mentioned above. They may take time to emerge in a new avataar but when they do, they will have created far greater wealth for their shareholders than paying out a two rupee dividend after registering an EPS of Rs 20!

Harshad Mehta