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Richie Rich

Is Mukesh Ambani the richest man in the world? He very well might be! The rise of the Indian market has elevated the Ambani brothers to the top of the rich men list. But how realistic is this evaluation?

One side-effect of the irresistible rise of the Sensex has been the catapulting of Mukesh Ambani to the top five globally in terms of wealth (younger brother Anil is also a Top Ten candidate). In fact, some hasty back-of-the-envelope calculations suggest that he may well be the richest man in the world right now (October 29).

Forbes released its billionaires list in September when the US magazine reckoned the richest man in the world was Mexican telecom magnate Carlos Slim Helu (then reckoned to be worth $59 billion), who had overtaken Bill Gates of Microsoft and investment guru Warren Buffett.

Those numbers were calculated on the basis of share prices on August 30. At that time, Lakshmi Mittal was in fifth place with Mukesh at no. 14 and Anil no. 18. Since then, Mukesh Ambani's Reliance group has led a market rally that has added 44 per cent to the value of flagship Reliance Industries (RIL), 82 per cent to the value of Reliance Petroleum (RPL) and an incredible 522 per cent to the value of Reliance Industrial Infrastructure (RIIL).

Therefore, Ambani is now certainly a member of the top five and he may well have made it to no. 1. Gates, Buffett and Slim have seen relatively minor additions of 7-8 per cent to their net worth in the past two months.

There will be justified celebrations in Jamnagar and Mumbai if the calculations are valid. However, this is also a pointer to the bubble building up in the Indian markets. Think about the underlying implications. Mukesh Ambani owns about 51 per cent of cash-cow RIL which is the largest Indian corporate with the largest shareholder base and a 2006-07 turnover of over $27 billion and profits of $ 4.7 billion.

He also owns about 37.5 per cent of RPL, which is still a year away from production. He owns about 46 per cent of RIIL, which is seen as a pipeline play since it will construct and own the infrastructure required to pump gas from the KG Basin to the West coast. In quarter 1 ended June 2007, RIIL declared a profit of about Rs 4.7 crore on total income of about Rs 18 crore. On the Q1 annualised EPS, the RIIL valuation is something like 235.

Those numbers are unreal. RIL itself trades at 34 times the trailing 2006-7 PE, which is incredible for a petrochemicals conglomerate, where a PE of 10-15 is considered on the high side. RPL is yet to go into production and so, we can't even assign a valuation. And RIIL as already mentioned, is very richly-valued.

The last time one saw such valuation was in the dotcom era when IT companies (including excellent businesses as well as fly-by-night operators) were traded at triple and four-digit multiples. Well, the good IT companies of that era are still very much in business. But we all know what happened to the punters who bought those shares so happily at the height of the 2000 boom.

In 1999-2000, there was some excuse for “fuzzy” exuberance. The Internet promised to open uncharted territory for IT and the Y2K boom and labour arbitrage helped Indian IT companies to log 100 per cent growth rates. Market analysts had problems judging exactly where the scaling-up of profits could end.

Reliance Group is in much more earthy businesses where the market is more capable of making sensible projections of future revenues. The problem is, the market seems to be ignoring those projections in assigning PEs to businesses, which are usually considered over-valued in the 10-12 region. True, there is an upside to retail and the other new businesses but is that enough?

Just for benchmarks, Microsoft had 2006 revenues of about $44 billion and net profits of $12.7 billion. America Movil, which is Slim's flagship and holds near-monopoly status in Mexico's telecom sector, had 2006 revenues of $21.5 billion and net profits of $3.9 billion. Berkshire Hathaway, Warren Buffett's holding company, controlled 2006 revenues of $98.5 billion and generated net profits of $11 billion. Mittal's Arcelor had 2006 revenues of $40 billion with profits of $4.8 billion.

It imbues one with a sense of nationalistic pride to know that an Indian has hit no. 1 on the global net worth rankings. But let's not lose one's sense of perspective. Mukesh Ambani is up there because the market valuations of Indian companies are unrealistically inflated at this instant.