Excessive promoter control a mixed blessing for RIL investors: Damodaran

NEW DELHI: Valuation guru Aswath Damodaran finds Reliance Industries an interesting company and compares it with Microsoft, but believes excess promoter control on the company is a mixed blessing.

In an exclusive interview with ETNow, the professor of finance at Stern School of Business expressed optimism that Tata Group would fix its legacy issues soon.

Calling Reliance Jio a cash-draining company, Damodaran said much of RIL’s cash has gone into the subsidiary, but “the segment has the potential to make RIL into a new kind of company because of its hundreds of millions of subscribers,” he said.


Damodaran said RIL’s petrochemicals segment churns the cash flows, which is similar to that of Microsoft. They both, he said, “are using their cash-generating businesses to create new businesses that they hope will create growth.”

FULL INTERVIEW: I take everybody including Warren Buffett, Ray Dalio with a grain of salt: Aswath Damodaran

He said the company needs to be careful about how it progresses. “If you let your ego and your hope run away with you, you can end up losing a lot of money in new businesses. What you are hoping for if you are a Reliance investor is that within the group, there is enough discipline in how they allocate capital that when they allocate capital to these new businesses, it is done sensibly,” he said.

For a Reliance investor, he said, one concern is that corporate governance is very weak. “You cannot as an outsider do much to change the way Reliance operates itself. So if change happens and it is not a good change, you are not going to be able to stop it. It is a mixed blessing, because having that kind of control over the company allows you to do interesting and new things, but having as much control as the Ambanis have over Reliance also means that as an investor you are fairly helpless if they decide to take the company down the wrong path,” Damodaran said.

On the Tatas, Damodaran said the group helped build India. But the longer a company has been in existence and more the culture is set, the more difficult it becomes to create change at the level, he said, noting that the Tata Group has a very long and illustrious history and one must not overlook that.

“A change is always going to be difficult. It is going to be three steps forward, two steps back. You saw the three steps forward when Chandra first came in, and now you are probably seeing the two steps back where the bureaucracy fights back. The key for the Tata Group is to continue to work on change and that has got to come from within. There will be incumbents who would fight back. It will be slow, but I am still optimistic that change can come,” he told ET Now.