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)|
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|
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.