Friday, December 29, 2006

Anil Ambani's thirst

Anil Ambani has been on an acquisition spree ever since he and his brother Mukesh split the Reliance empire in two. With his vast kitty and ofcourse reputated name there seems to be no lack of investors ready to finance his interests, the latest of which is the Hutchison Essar stake of 67% in Hutch. Hold your seats for this one. The valuation of that stake is said to be to the tune of $17-18 billion which when converted to rupees is a healthy 75-82,000 crores.

The stock market in India is highly overvalued, pushed upwards more by market speculation, emotional sentiments and a "we have a great future" attitude. That said there seems to be no justification for a telecom company to be valued that high especially since there has been no market consolidation at all before. There are no clear leaders and there is ample opportunity for each player to compete and get a larger share of the Indian consumer pie.

Just for the record the margins in which these companies are playing the telecom game in India is ridiculously low, waging wars more on finding a larger consumer base rather than capitalising on the already exisiting consumers that they have. The mean ARPU (average returns per user) in urban India is around $7 while that in rural India is around $3.

Considering all this wouldn't it be wise for Reliance telecom to use that kitty that it has for acquistions on better infrastructure etc and grow organically rather than get into a bidding war with international conglomerates who are looking for a growth pill from the emerging markets? And considering that the bidding is supposedly starting at the $17billion mark and will definitely move upwards, it would end up being more valuable that RCOM itself. Atleast on this case I think Anil is trying to bite off more than he can chew here.

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