Investing lessons from the fall of Anil Ambani led Reliance Group

Reliance is a giant! When it was divided, everyone rooted for all the new entities to succeed.

Yet, Anil Ambani, the chairman of Reliance Anil Dhirubhai Ambani Group (Reliance ADAG) has fallen significantly short of the expectations everyone had. Let's look at the reasons in this article. Let's also look at what investment lessons can we learn from his journey.

The best and the biggest companies can face a downfall if not managed well. Leaders have to be effective, and astute. Their decisions have to be rational, and the execution of these decisions has to be efficient. Here are three key areas where Reliance ADAG couldn't hold its ground.

Innovation
Any business in technology needs to stay innovative. Reliance Communications could not catch up with Airtel and Reliance Jio, when it came to 4G networks. They were unable to shake off the sticky CDMA (Code Division Multiple Access) platform and its limitations.

While they did borrow money and kept trying to grow the business despite competition, eventually the losses widened, the debt increased, and Reliance Communications finally shut down its wireless operations in 2017!

In other words, innovation and consistency of growth is where Reliance Communications could not keep up.

Debt trap
This one is a no-brainer! Desperate measures for growth can backfire if not planned well. While debt can help in magnifying returns, too much debt is always a red flag. If wise investment decisions are not made, the company is bound to fail!

Capex didn't go well
Just like debt, capex also needs to be managed responsibly and efficiently. The company tried to explore the defence sector by making India's largest defence acquisition of approximately Rs 2,427 crore for Pipavav Defence and Offshore Engineering Company (now Reliance Naval and Engineering). Now they have the largest engineering infrastructure in the shipbuilding industry in India.

While this seems to be a significant market advantage, this hasn't gone well for them. Post-acquisition revenues have consistently decreased and debt has been piling up.

So, what's the takeaway?
The takeaway from the journey of Reliance ADAG might sound obvious, but it is sometimes the easiest to miss.

The first thing to learn is that, while diversification is great, too much of it can backfire. Also, diversification is good, only when one really understands the business in which one is branching out.

Similarly, debt and capex are quite important in growth, and can give a business much needed impetus. However, they need to be managed very efficiently and responsibly, so that they do not create a debt loop in future.

Also read:
Not all capex lead to growth
Don't forget to look at the operating profit

This article was originally published on April 10, 2023.