Facebook-Jio deal | Will it help RIL deleverage and re-rate?

Anubhav Sahu & Neha Dave                          

Highlights:

- RIL targets to be zero-debt company by March 2021
- Adjusted net debt can shrink by 50 percent after recent transactions
- Moderating capex needs add to prospects for free cash flow soon- Future monetization of lucrative retail business and further value unlocking in digital possible

 -------------------------------------------------The Facebook-Reliance Jio deal announced on April 22 reaffirms the RIL management’s commitment to deleverage its balance sheet and energize the businesses of the future. Remember, RIL targets to become a zero-debt company by March 2021 and the Facebook deal helps to accelerate this process.

The deal includes Facebook buying a minority stake (9.9 percent) in the digital business segment (Jio Platforms), for Rs 43,574 crore.

Also Read: Facebook deal to accelerate Jio's listing push

On asset monetization spree

The Facebook deal is one of the many asset monetisation steps company has taken over in the last one year to deleverage the balance sheet.

Last year, the company announced the divestment of 20 percent stake in its oils-to-chemicals business to Saudi Arabian oil company, Saudi Aramco. This is expected to fetch about $15 billion.

Additionally, RIL has signed a joint-venture in the petroleum retailing business with BP, where BP will acquire a 49 percent in the petro-retail business for Rs 7,000 crore (USD 1 billion).

Further, it is attempting deleveraging telecom businesses through the creation of the investment trusts (InvITs) for its telecom infrastructure (fibre and tower assets), which will reduce the consolidated debt by Rs 1.17 lakh crore. Note that RIL has invested over Rs 350,000 crore towards creating a state-of-the-art digital infrastructure across India, with the largest optical fibre footprint. Divesting these assets into separate infrastructure investment trusts or InvITs is the way to monetise the investment.

For the tower assets, Brookfield would invest $3.7 billion in the Tower infrastructure trust valued at $8 billion. The deal has received CCI approval and now awaits the nod from the Department of Telecommunications (DoT) and the Ministry of Home Affairs (MHA).

Impact of the deal on the company’s balance sheet

Our back-of-the-envelope calculations suggest that net debt can decrease by 80 percent if the inflows from the deals with Facebook, Aramco and BP are used to deleverage. In result, net debt to equity ratio can reduce from around 0.8x to 0.14x in the best-case scenario.

However, given the recent turmoil in the crude oil market and COVID-19 crisis, we have looked at different scenarios for the timeline of asset monetisation.

Table: Deleverage Scenario

Source: Moneycontrol Research

Even if we don’t include the Aramco deal in the deleveraging calculation, net debt could potentially reduce by 50 percent and gearing ratio can settle to about 0.4x due to recent asset monetisation announcements.

Capex down cycle 

Additional comfort from the balance sheet point is that requirement for the capex is decreasing. Which means need to raise further debt in the near future is limited. RIL’s capex run rate is expected to decline in the old economy (Oil/Chemicals) business with the commissioning of the majority of projects in downstream petrochemicals. RIL’s management has already declared that the capex cycle for telecom is over and any major capex requirement would expectedly be restricted to new business related to retail and connectivity.

Capex down cycle 

Source: RIL, Moneycontrol Research

The upshot is that with the increasing profitability of the digital and retail businesses, prospects for free cash flow have increased. This would further help to reduce the remaining debt in the books.

Overall, the deleveraging cycle for RIL appears to be a well-calibrated move. In our view, the staggered asset monetisation steps are also helping in fetching better valuations. In a medium run, this should also aid in attracting better value for the future asset sale or listing/spin-off of businesses such as retail and digital.

In the meantime, inducting a leading global company in its digital business is a welcome move and should be viewed positively by the shareholders.

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Catch our entire coverage on the Facebook-Jio Deal here.

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