Resources ET Rise Dialogue. GST Invoice Generator. Startup Handbook. Vishal Dutta. Rate Story. Font Size Abc Small. Abc Medium. Abc Large. ET Bureau. Vimal Ambani, the nephew of Dhirubhai Ambani after whom the storied Vimal textile brand is named, is becoming a startup mentor.
He joined a newly established incubator, Indus Mentors. He was previously the chief executive of the textile division at Reliance Industries. Visit www. The real risk in such deep vertical integration is that you have to understand several markets, and live with several business cycles, which may or may not coincide. You have to understand each one of them, and to really run them all efficiently, you have to operate each one of them as though they were separate businesses.
If you don't, it essentially means sub-optimal profit maximisation. Let's understand this with an example. If, for example, crude prices are rising strongly, to maximise profits you should be cranking up your production and selling oil to anyone anywhere in the world. But when you have your own refinery, you will probably underprice it to protect your refining business. So instead of maximising profits from crude, you will sell the oil to your refineries with the hope that you will recover the additional profits from the petrol and diesel your produce.
But the two markets are different: crude prices and petrol prices may not rise commensurately and, anyway, there may be price controls: if petrol prices are stagnant when crude is rising, your overall profits will fall. We can expand the examples to many other products - but the result will be the same. The only way to maximise profits in a vertically integrated chain of manufacturing facilities is to run each individual part of the chain as a separate business.
Thus if crude is more profitable, you sell crude and let the refining business fend for itself; if petrol is zooming, you should buy the kind of crude that optimises your petrol output rather than buy your own parent company's output. Of course, this begs the question: why did Reliance opt for so much vertical integration in the first place? The answer lies partly in the licence-permit raj and the anomalous duty structures it created.
When centre and states were levying high duties on various products at every stage of production from raw materials to intermediate to final products , the only way to reduce the impact of cascading duties is to integrate vertically.
However, the introduction of value-added tax VAT at the state and central levels, and a future with the unified goods and services tax GST means that companies pay tax only on the value they add, and get deductions on the taxes already paid on their inputs. So, it no longer matters if I buy a petrochemical from within the same plant or from someone else, since my GST depends on the difference between my purchase price of inputs and my final product selling price, minus the taxes already paid by my input suppliers.
Vertical integration is no longer justified only on tax grounds - though it may make sense in case there is going to be huge uncertainty over supplies of raw materials or whatever. In fact, vertical integration may be counter-productive unless a company can ensure that each part of the integrated business is being optimised for profits every year.
In a nutshell, one can state why Dhirubhai did all this: he integrated backward and forward to save on cascading taxes; he created bigger and bigger agglomerations of businesses in order to build size and scale in an India protected by tariff walls; size enabled him to raise more and more capital, both from lenders and the equity markets; and this capital enabled him to create global-scale capacities at lower cost than his competitors despite high import tariffs on capital goods, plant and machinery.
His did this by doing the following: he raised debt and converted it to equity at high premia to effectively reduce his cost of capital. And he ensured high share prices by two ruses: creating companies and then merging them into Reliance; and by ensuring his share prices remained high by constantly feeding his investor base with the prospect of higher returns. But investors are now demanding greater clarity from all companies. They do not want to look at confusing balance-sheets that tell you little about the underlying businesses.
They may not even want to invest in a company that is all over the place. This feature of Naroda is without a parallel. RIL Textile Division continues to maintain technological edge and continues to enjoy the status as one of the most modern, state-of-the-art textile plants in the country.
The second thrust area, automotive furnishing consists of Jacquard weaving, knitting and finishing line. We have been audited by some of our international customers for BSR before commencing business — this only shows our concern for the society around us. How can I use this image? Common uses include: Newspapers and magazines except for covers , editorial broadcasts, documentaries, non-commercial websites, blogs and social media posts illustrating matters of public interest Can't be used for: Commercial purposes, trademarks, merchandising, marketing and promotions, endorsements purposes in any media.
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