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Is India’s Private Sector Truly Competitive?
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Good morning. In today’s edition — lessons on India’s private sector from the Essar group’s journey; a big tax bill for Korean auto giant’s Indian arm Hyundai Motor; and a trade tit-for-tat between China and France.
THE TAKE
Essar Group’s Downfall Against Reliance’s Rise Has Lessons On India’s Private Sector
The passing of Shashi Ruia, who founded the Essar Group along with younger brother Ravi Ruia in the late 1960s brings back memories of Essar’s shadow corporate battle with Reliance Industries in the 1990s.
Both Reliance Industries & Essar Group were racing to build the first major private sector refinery projects in Jamnagar on the west coast of Gujarat.
As it happened, Reliance’s refinery was commissioned by early 2000, also the world’s largest grassroots refinery at the time.
Essar’s project was delayed, for among other reasons, by a cyclone which hit the west coast of India and Gujarat in mid-1998.
Essar’s refinery project then suffered a series of delays, leading to financing challenges as well. It finally started production in 2006 with a capacity of 7.5 million tonnes per annum.
By then, in some ways, the group’s fortunes had already begun to dip.
Interestingly, the same cyclone had a much lesser impact on Reliance’s refinery construction efforts. Reliance was able to pick up the pieces so to speak and resume construction for what was commissioned as a 27-million tonne refinery in early 2000 with the company saying it took just 36 months to build it.
Around that time, Reliance was going from textiles to petrochemicals to energy along with finance, Essar was going from shipping to oil exploration to steel, mining, power, telecom and also finance and banking.
Arguably, the opportunities were many as sectors like oil and gas were opening up for the first time and many ambitious entrepreneurs and business houses were jumping in.
And yet, there was rivalry shaping up between Reliance and Essar as both began treading into each other’s zones.
In the mid 1990s onwards, Essar was actually housed in Maker IV in Nariman Point, south Mumbai.
If Maker IV sounds familiar, that is because it is.
Because Maker IV is where Reliance founder Dhirubhai Ambani once sat and his son Mukesh Ambani now sits.
It is still the headquarters for Reliance Industries. Essar subsequently moved out to its own building next to Mumbai's race course.
So the two groups were clearly stepping on each other's toes, in the elevators going up Maker IV if nowhere else.
Essar’s Momentary Rise
The challenge was not so much the market opportunity but access to finance at the time. Both companies were raising debt and equity from banks, financial institutions and the public and there was bound to be some friction, more likely when it came to debt since the lenders were only a handful.
This was during a time when policies on the private sector’s role in oil and gas — including the distribution of refinery products like petrol and diesel — were still evolving. Essar never really recovered from its cyclonic encounter. Its steel business predominantly located in Hazira, also in Gujarat, started accumulating debt.
Eventually, the Ruias sold Essar Oil in 2016 as a stressed asset to Rosneft, a Russian integrated energy giant, something like the Russian equivalent of an ONGC and IOC for around $13 billion. Strangely, Rosneft has no other presence in India before or after, at least in plant and machinery that I could see and the deal itself had heavy political overtones.
Meanwhile, Essar Steel was sold to Arcelor and Nippon Steel in 2019, bringing down the curtains on that too. The Essar Group continues to exist today, growing in areas outside India and in smaller ventures in India including green energy transportation but it is a much reduced version of the giant it was aiming to become in the early 2000s.
After Essar's momentary rise to become a challenger to Reliance, as India’s largest energy conglomerate, the field has been wide open for almost a decade or more. Till the arrival of the Adanis.
A Niggling Concern
The Adanis came from ports, once again in Gujarat and then moved onto energy, infrastructure, cement and construction, including airport assets and real estate. Reliance and the Adanis don’t seem to be overlapping much right now, except perhaps in news media which both own.
The avoiding of overlap may not be accidental and more because of careful design. Many overseas fund managers I meet often ask if businesses who go up against Reliance then or Adani today would survive.
The answer with Reliance is quite simple as there are several real life examples for everyone to see. Be it natural calamities or other misfortunes, most of Reliance’s key rivals have melted away or imploded over the years.
In the case of Adani, it would seem that there are areas like airport contracts or the mega Dharavi slum redevelopment project in north central Mumbai where potential rivals seem to take a step back, at least that’s how it appears from outside.
There is nothing that suggests the Adanis and Ambanis, the two largest conglomerates in adjacent businesses in energy, are faced off against each other. Nothing publicly at least.
But this is a niggling concern for most investors, how competitive and open are Indian markets really? Will they have to cherry pick sectors where the Adanis and Ambanis are not playing or is it fine to invest in companies ranged against them?
In the oil and gas sector, state-owned companies such as Indian Oil, Bharat Petroleum and ONGC have been able to stand their ground against Reliance. This suggests that some parts of the competitive economy are working as they should. Whether this would extend to private enterprises in other sectors as well is a question that awaits clarity.
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CO:RELATION
Godrej Properties Bulks Up
Real estate development is a hungry business. It sucks capital significantly before rewarding developers with profits. Godrej Properties has been a critical driver of valuations in the residential real estate segment. The company’s shares have outperformed the Nifty 50 and the Nifty Realty index in 2024. However, the company’s share price has been underperforming over the past month.
A key indicator of buoyancy in the business is the extent of growth in pre-sales. That is a parameter for the buyer interest before the project commences. According to India Ratings, an affiliate of global credit rating agency FITCH, Godrej Properties has reported muted growth for the September quarter of 2024-25. The agency also noted that the company has built up significant debt for land acquisition and business development activities during the quarter. Macrotech Developers (Lodha) reported a stable debt profile despite a faster pre-sales growth rate than Godrej Properties. The share price of Macrotech jumped 15% in just a month after underperforming Nifty Realty and Godrej Properties in 2024.
HOW INDIA’S ECONOMY WORKS
Global Economic Outlook: Trump's Policies and Emerging Challenges
In an in-depth podcast with journalist Puja Mehra, Neelkanth Mishra, Chief Economist at Axis Bank, analyzes the potential impact of a Trump presidency on India and global markets. Mishra warns that financial markets could see significant turbulence, with the United States potentially pulling investment away from countries like India. He estimates that reciprocal tariffs could create a $6-7 billion impact for India, though indirect trade routes may soften direct economic consequences. However, Mishra downplayed Elon Musk's potential influence on US-India relations, asserting that institutional protocols will likely curb any significant direct impact.
CORE NUMBER
270 million
This is the total number of 5G mobile connections expected in India by the end of 2024, accounting for 23% of the country's mobile subscriptions, as projected by the Ericsson Mobility Report. This signifies a substantial increase from the 119 million 5G users recorded at the end of 2023. Despite India's swift 5G rollout, the quality of 5G service has been a concern, particularly in terms of average and median speeds. Speedtest provider Ookla reported in October that India's median download speeds fell by 15%, from 107.03 megabits per second (Mbps) in April-June to 91.7 Mbps in July-September, the lowest since October 2023.
FROM THE PERIPHERY
—🚘 Hyundai Motor India Ltd (HMIL) has received a show cause notice from the Maharashtra State Tax Authority over alleged discrepancies in input tax credit (ITC) claims for FY 2020-21. According to Business Standard, the notice cites excess ITC claims and unpaid reverse charge mechanism (RCM) tax, demanding Rs 2.741 crore in tax and Rs 2.279 crore in interest. Hyundai clarified in filings to the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) that it will respond within timelines, emphasising no immediate impact on operations. This comes as HMIL reported a 16% Q2 profit dip, citing weak domestic demand and export disruptions from the Red Sea crisis.
—🍷 There seems to be a trade war brewing between China and the European Union (EU) over electric vehicles and brandy, and french luxury brands such as Louis Vuitton Moët Hennessy (LVMH) are reportedly caught in the middle. What’s the issue? Last month the EU introduced tariffs, that go up to 45.3%, on Chinese-built EVs to protect its local EV market. China in turn has introduced brandy tariffs — 39% on the wholesale value of shipments to China — putting importers such as LVMH in a tough spot, The Economic Times reported. LVMH owns the cognac brand Hennessey. Beijing’s action reportedly led to stocks of brandy makers like LVMH to slump. Both France and LVMH have downplayed the issue, but Paris called China’s actions “political and retaliatory”.
—⚖️ The Adani Group's troubles continue to escalate following the US indictment, with repercussions growing every day. Reuters reported on Tuesday that Andhra Pradesh state is considering suspending its power purchase deal with the Adani Group, citing the bribery allegations against its founder, Gautam Adani. The state government also plans to request an investigation by the federal government and the Solar Energy Corporation of India. Additionally, Sri Lanka is reviewing the accusations, with cabinet spokesperson Nalinda Jayatissa stating that the government will thoroughly assess all aspects of the Adani Group's projects in the country.
—💸 The Union Cabinet's decision to waive bank guarantees for spectrum purchased before 2022 will bring significant relief to telecom companies in India, particularly the debt-ridden Vodafone Idea. Vodafone Idea had missed the deadline to submit a bank guarantee of Rs 24,746.9 crore for spectrum payments due between October 2025 and September 2026. The waiver also benefits Bharti Airtel and Reliance Jio, which had smaller bank guarantee requirements of Rs 2,300 crore and Rs 4,000 crore, respectively. This move is expected to ease the financial burden on telecom companies and potentially boost investments in the sector.
Editor’s Note: Due to a technical glitch, an earlier version of the Periphery section was mistakenly carried in the November 26 edition of The Core. We sincerely regret the oversight.
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