How will the rights issue change RIL’s capital structure?
Reliance Industries has officially announced an issue of rights shares in the ratio of 1:15 (1 rights share for every 15 shares held) at a price of Rs1,257 per share. The rights price has been fixed at an attractive discount of 14.26% to the closing price of Reliance Industries on April 30, 2020 at Rs1,466. This will be the first time in 29 years that Reliance Industries will be issuing rights shares. Here is how the capital structure of RIL will look post the rights issue.
|Number of shares outstanding (A)||633.87cr|
|Rights issue ratio||1:15|
|Number or rights shares to be issued (B)||42.26cr|
|Indicative price of rights issue (C)||Rs1257 per share|
|Total Money to be raised via rights (B x C)||Rs53,121 cr|
|Post rights shares outstanding (A + B)||676.13cr shares|
|Capital dilution due to rights issue||6.67%|
From an overall perspective, the capital dilution for RIL would be around 6.67% as a result of the rights issue. That will be a marginal dilution in the EPS of the company and would not substantially impact shareholder value. The promoters have also offered a comfort to the minority shareholders. Promoters will be subscribing to their share of the rights and will also absorb any unsubscribed rights portion. At Rs53,121cr, this will be the largest rights issue in Indian corporate history.
How rights will help in RIL’s zero-debt plans?
To understand the urgency Reliance exhibited in reducing its net debt to zero levels, it is essential to recollect that Reliance was a net-zero debt company till fiscal year 2012-13. It is only when the massive investments into Reliance Jio telecom business started that the debt levels started to go up sharply. The graph below captures how the net debt levels have moved up in the last five years for Reliance Industries.
Clearly, the net debt to equity ratio has gone up sharply from 1X to nearly 4X in the last four years. Since the capex cycle started in 2013, RIL has sunk in Rs550,000cr into building the telecom and data business as well as upgrading the oil refining and petrochemicals business. A large chunk of these investments have been funded by debt and that has resulted in the net debt / equity ratio going up all the way to 4X. That is clearly forcing Reliance to aim for rapid debt reduction.
How the rights will assist the asset monetization plan?
What has necessitated the rights issue after a gap of 29 years? Clearly, the well drawn out asset monetization plan for defraying debt is likely to run into challenges. Here is why.
|Asset Monetization Plan||How much it will raise?||Current Status|
|20% stake sale to Aramco||Rs75,000cr||Uncertain due to oil crash|
|Fuel business sale to BP||Rs15,000cr||Yet to be finalized|
|Tower Sales to Brookfield||Rs25,000cr||Yet to be finalized|
|Sale of stake in Jio to Facebook||Rs43,500cr||Finalized|
|Back-up plan of Rights issue||Rs53,120cr||Ratio finalized|
To put the rights issue in perspective, one must understand the current asset monetization plan to become zero-net debt by March 2021. RIL currently has net debt of Rs155,000cr. If the original asset monetization plan goes through (even assuming lower valuations offered by Aramco) the company should be able to sail through with its zero debt plans by March 2021. But that is where the real challenge arises. The deal to sell 20% stake in the oil and chemicals business to Aramco is becoming increasingly uncertain due to the sharp fall in global crude oil prices. The Kingdom of Saudi Arabia is also facing financial challenges as is evident from its depleting forex reserves.
While Facebook is a done deal, the Brookfield tower sale and the sale to BP could get impacted by the COVID-19 and the resultant global slowdown. It is in these circumstances that the rights issue of Rs53,120cr would be a critical backup for RIL’s debt reduction plans. Of course, RIL would also want to retain some cash for its business and that may be a real advantage in these uncertain times. If by then, the Aramco deal also sails through, then it could be icing on the cake!