Can Reliance meet its Mar-21 target of zero net-debt?

Reliance Industries stock lost nearly 50% of its value during the pandemic lockdown but managed to recoup all its losses with equal vigour. Let us understand will Reliance be able to become net-debt free by March 2021.

May 22, 2020 12:05 IST India Infoline News Service

Reliance has been one of the few Nifty heavyweights to show an absolute V-shaped recovery this year. The stock lost nearly 50% of its value during the pandemic lockdown but managed to recoup all its losses with equal vigour. Two things helped Reliance in this sharp recovery; monetization of its stake in Jio Platforms and its calculated move towards becoming zero-net debt by March 2021.

Data Source: NSE


The stock price correction in the last couple of weeks is more due to the overhang of the mega rights issue that is under way. Before we get into the monetization strategy, let us look at the net debt situation of Reliance Industries.
 
How Reliance got into a pile of debt?
 
As late as 2012, Reliance Industries was a zero-net debt company. The spate of borrowings started after 2012 when RIL had to invest close to Rs550,000cr into the Jio telecom business. This was partly funded by the cash flows from its lucrative refining and petchem business but also entailed a large portion of debt. The situation currently stands as under.
Gross Debt Cash and cash equivalents Net Debt (Mar-20)
Rs336,294cr Rs175,259cr Rs161,035cr
 
It is this net debt of Rs161,035cr that Reliance is targeting to wind down to zero by March 2021. How feasible is that and what is the likely modus operandi?
 
Monetization of Jio Platforms stake has been aggressive
Jio Platforms Stake Sale % stake sold Amount Realized Implied Valuations
Facebook Inc. 9.99% Rs 43,574cr Rs 436,176cr
Silver Lakes Fund 1.15% Rs 5,655cr Rs 491,804cr
Vista Equity Partners 2.32%  Rs11,367cr  Rs489,957cr
General Atlantic Partners 1.34% Rs 6,598cr Rs492,416cr
Kohlberg Kravis Roberts 2.32%  Rs11,367cr  Rs489,957cr
Overall Monetization 17.12% Rs78,562cr Rs458,891cr
 
Data Source: www.ril.com
 
The original plan of RIL was to sell 20% stake in the Reliance refining and chemicals business to Saudi Aramco for a consideration of Rs114,000cr. However, even as the deal got held up on regulatory grounds, the global oil scenario changed drastically. Brent crude prices crashed to a low of $16/bbl and the Singapore benchmark gross refining margins (GRM) also dipped to new lows. At these valuations it did not add value for Saudi Aramco while RIL was not keen on selling out of its refining and chemicals business at lower valuations.
 
That raised the prospect of monetizing the stake in Reliance’s digital properties, Jio Platforms. Due to the disruptive potential of digital services in India, RIL has already placed 17.12% stake in Jio Platforms for a consideration of Rs78,562cr. That still leaves a gap of close to Rs83,000cr for Reliance Industries to become zero net-debt.
 
Mega rights issue to help along the way
 
One of the key aspects of RIL’s Plan-B was the Rs53,125cr rights issue. Clearly, RIL is not counting on the Saudi Aramco deal to happen till the time oil prices and refining margins stabilize globally. RIL will additionally get around Rs30,000 crore from the sale of telecom towers to Brookfield and from its oil marketing JV with British Petroleum. But there is a catch on the rights issue front. The entire rights proceeds will not be realized immediately. While 25% of the proceeds of the rights will be received now, another 25% will be received in Jun-21 and the balance 50% in Nov-21. That will still leave RIL with a gap of around Rs.40,000 crore in its endeavour to become zero-net debt by March 2021.
 
What are the options for RIL to become zero net-debt by Mar-21?
 
The ideal option for Reliance would be to close out the stake sale in the oil and chemicals business to Saudi Aramco. But that would require Brent crude prices to at least scale above $50/bbl. The second option would be to delay the zero net-debt target date from Mar-21 to Nov-21 by which time the proceeds of the rights issue will come through. However, Reliance has been quite passionate about sticking to the Mar-21 deadline. The third option is to monetize more of its Jio Platforms stake. But it is unlikely they will go much beyond 20% dilution of stake with the digital property being central to RIL’s future strategy. After data is their new oil!

In the past, RIL has demonstrated that it always plays with a trump card up its sleeve. We need to wait and watch for that trump card.

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