The Facebook deal is now the centrepiece of the ambitions of India’s biggest private company to cut net debt to zero by March 2021
Facebook has bought a 9.9 percent stake in Reliance Jio for $5.7 billion (Rs 43,574 crore). Jio, now valued at $65.95 billion in less than four years after its commercial launch, makes parent Reliance Industries (RIL) among the top-five listed companies in India by market cap.
This gives the social media company a foothold in India’s fast-growing market and access to more than 388 million Indians online. It also helps billionaire Mukesh Ambani-led RIL cut significant debt.
RIL’s debt, bulged due to the breakneck expansion of Jio - where Ambani invested $40 billion in 2016, and other businesses. The Facebook deal is now the centrepiece of the ambitions of India’s biggest private company to cut net debt to zero by March 2021.
Prior to this, RIL accelerated efforts to reduce debt by attempting to sell stakes worth billions of dollars in some of its businesses. It is in talks with Saudi Aramco to sell 20 percent of its oil to chemicals business and Canadian private equity firm Brookfield Asset Management for a stake in its telecom tower business.
Ambani, in his speech while addressing the company's 42nd Annual General Meeting on August 12, 2019, said the company had a “very clear roadmap to becoming a zero net debt company by March 31, 2021.”
In 2018, Reliance transferred telecom infrastructure assets to two separate infrastructure trusts for a consideration of Rs 1.25 lakh crore with the intention of raising this money from large global institutional investors.
For the same, it has received strong interest and commitments from reputed global investors and is confident that these transactions will be completed by the end of FY21, Ambani said. He added that the company had ended FY19 with net debt of Rs 154,478 crore.
Ambani also said Saudi Aramco would buy 20 percent stake in RIL’s oil-to-chemicals (02C) division, at an enterprise value of $75 billion. Reliance also signed an agreement with BP for investment in KG-D6.
"The commitments from these two transactions are about Rs 1.1 lakh crore," he added.
Now, with RIL’s 2021 vision in place and swiftly moving, investors should expect major debt reduction moves through stake sale, asset monetisation and value unlocking through listing or strategic sale of key business divisions.
Along with these moves, RIL is doubling down on its consumer businesses—Reliance Retail and Reliance Jio Infocomm. These two consumer businesses contribute nearly 32 percent to the consolidated EBITDA currently and their share is likely to increase to 50 percent over the next few years.
This transition to zero debt company along with transformation from commodity business to consumer oriented business should be value accretive for investors.
Analysts also state that RIL’s net debt will fall even if energy and retail demand struggles for six months and the planned asset sales are delayed. They feel that RIL can re-prioritise investment, potentially slowing capex by up to a third.
Beyond COVID-19, RIL emerges stronger as competitors face high debt challenges and slow investments, Morgan Stanley said in a research report.
RIL, it said, has the flexibility to prioritise its investments in FY21, and could thereby reduce cash outlay by 25-30 per cent. Still, capex on ongoing upstream gas production, telecom spectrum renewal, and maintenance may be required.
Stating that RIL's net debt might not rise in 2020-21, Morgan Stanley said its analysis suggests limited liquidity challenges even if the company's utilisation rates and margins remain challenges in its cash cow energy business.
Also, about half of RIL's debt and liabilities are largely USD funded, hedged via its dollar-linked energy cash flows. However, RIL could raise debt, as some of its creditor liabilities fall due or for refinancing.
RIL has consolidated net debt and liabilities of $46.2 billion and an annual pre-tax profit of $13.6 billion.
The company has previously announced plans to monetise many of its assets, including holdings in energy, telecom, and content businesses. These plans, if executed, could lower debt by about $39 billion, but would also lower earnings by 16 percent.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd
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