RIL may use refining arm stake sale to reduce debt, say analysts

Analysts say the firm may use some proceeds in digital business

Oil-to-telecom conglomerate Reliance Industries (RIL), which is in talks with Saudi Aramco to sell around 25 per cent in its refining and petrochemicals businesses for $10-15 billion, may use the proceeds to reduce its debt and invest in its new-age digital business, say analysts.

Though Reliance has not made official comments on the stake sale, reports indicate RIL’s talks on valuation with Saudi Arabia is on with the company seeking around $15 billion for its 25 per cent stake.

A RIL spokesperson has said the company does not comment on market speculation though it evaluates several opportunities at any given time.

Analysts said RIL may utilise the cash flows from sale of downstream operations in digital and retail businesses, which may be of utmost priority for the company. “This (sale) may effectively ease leverage to further build on digital technology platform business. More importantly, the released cash flow will ease out the leverage, on and off its balance sheet, allowing it to direct more investments in building its digital technology platform business,” analysts said.

RIL’s outstanding debt as on March 31 rose to Rs 2,87,505 crore as compared to Rs 2,18,763 crore as on March 31, 2018. Cash and cash equivalents as on March 31 this year were at Rs 1,33,027 crore as compared to Rs 78,063 crore as on March 31, 2018.

Analysts at Kotak Institutional Equities said any transaction at 6-6.5 times downstream Ebitda (earnings before interest, tax, depreciation and amortisation) of RIL albeit closer to global peers may be a tad disappointing given higher valuations ascribed by investors. “We compute RIL’s effective consolidated net debt/commitments of around $53 billion as of December 31, 2018, which includes $40 billion of net debt including capex creditors, $3 billion of deferred spectrum liabilities, and $7-8 billion of estimated financing through working capital and finally $2 billion of liabilities related to Reliance Jio devices,” it said.

On the other hand, it said RIL had invested around $45 billion in its telecom services, Jio and an undisclosed amount in creating the app and content ecosystem routed through parent and other subsidiaries, besides investing/forging partnerships with related companies/start-ups, including Network18 group, Hathway Cable and Datacom, Den Networks, Kai-OS, Eros International and Saavn.

Analysts said any potential deleveraging by RIL in any shape or form may rule out an easing of pricing in the telecom sector anytime soon.

“While it may be difficult to estimate incremental revenues from RIL’s platform construct, we may have to rule out an increase in telecom average revenue per user (ARPU) built in our estimates over the next few years. We are not sure if telecom ARPUs should be given any point of consideration any more as RIL (not Jio) is still trying to build a large subscriber base for its platform business opportunity," the report said.

The investors are also awaiting information on any commercial commitments on sourcing of crude oil, which could be the primary driver for Saudi Aramco to be interested in downstream business,” the report said, giving a sell recommendation on the stock.