Importance of Valuation
Case Study on Reliance Industries
The article that I am writing today is like connecting the dots of Reliance Industries till now. By end of this article, you will get to know why Anil Ambani went bankrupt from being the 6th richest man in the world. While Mukesh Ambani emerged as a world leader on the other hand. And most important all, why valuation is really important for everyone.
So let’s start from the very beginning in 2005. Back then, both brothers were separated due to a very ugly spat and thus ended up taking different sectors. Mukesh Ambani got Oil, Gas, Petro-chemicals, Refining and Manufacturing. Anil was given electricity, telecoms, financial services and entertainment. Looking at the sectors, Anil seemed to be ahead of Mukesh in terms of the revolution in technology that had already started to take place back then. Also, when the separation had taken place, both the brothers have entered into a pact that no one is allowed to enter into the same business as his brother for 10 years. So, Mukesh couldn’t enter into industries like telecom and power and the same goes for Anil when it comes to Oil or Petro-Chemicals.
That is why Mukesh Ambani launched Jio Infocomm. Ltd in 2016. He waited patiently for so many years but he was able to see the future back then in 2010. Many people believe him to be really lucky for all the money he’s got. But, according to me, Mukesh Ambani is a fairly intelligent man. I feel fortune serves the brave and smart. Mukesh Ambani was able to see that a major revolution is going to come and technology’s gonna boom. So, he knew the value of industries like telecoms and the internet. But he was bound in a contract so he played really smart.
4G spectrum technology was available in 2010 but it was very costly so it was decided to conduct an auction for the purpose. At the end of the auction companies including Airtel, Vodafone and Idea were outwitted by a small company called Infotel Broadband Services Limited (IBSPL) promoted by Anant Nahata.
IBSPL ‘s promoting company Infotel Digicom Private Limited (IDPL) had equity capital of Rs. 6 lakh and a net worth of Rs.8.55 lakh. IDPL did not have any fixed assets as of that date. Nevertheless, it managed to meet the financial requirements for the bidding. The results of the auction were declared on June 11 and it was clear that IBSPL has won.
You must be thinking that how did this microscopic company find the humungous amount of finance to become a major player in this intensely competitive industry? After all, it defeated companies like Anil’s Reliance Communications, Vodafone and Tata Communications. I think every detail points in the same direction. Yes, it was Mukesh Ambani who was the man behind all of this. IBSPL was acting as a front for the Mukesh Ambani.
On the same day, IBSPL issued 75% of its shares to Reliance Industries Limited. On June 19, 2010, it went public from a private limited company. On January 22, 2013, the company was renamed Reliance Jio Infocomm. Limited. And finally, when Jio finally entered the market, it created a monopoly.
So moral of the story = Value is the core of everything. Mukesh Ambani saw what is that of utmost value in the future. He found his answer. Valuation is simple and easy for all of those who are keen on the future. While on the other hand, Anil’s company filed for bankruptcy due to failed dealings and companies being mismanaged.
I think valuation is not at all complex. Instead, it means exactly the same thing written into a 4th standard kid’s book that value is simply the “worth”. We all have this habit of saying “Is it worth it”? “Is it worth it”? Valuation lies here only. So, you can value everything from a vendor to a big company like Apple. The quintessential example of value investing is Warren Buffet and he has clearly said that Price is a feeble concept. Rather, if you invest in the value of the company like how the company treats its employees or what is the vision of the company you will never have to care about the fluctuating prices.
So, this is my take on valuation. What’s yours?
