Mukesh Ambani needs to balance the ship; rights issue not very attractive

Mukesh Ambani needs to balance the ship now; RIL rights issue unattractive

In 2019, during the Vibrant Gujarat Summit, Reliance Industries (RIL) Chairman, Mukesh Ambani, said: “In this new world, data is the new oil. And data is the new wealth. India's data must be controlled and owned by Indian people and not by corporates, especially global corporations”. However, Facebook’s head of global affairs & communication, Nick Clegg, said the analogy was mistaken and said: “India should allow free flow of data across borders instead of attempting to hoard it within national boundaries”. This debate was put to rest when India introduced the Personal Data Protection Bill, 2019, in Parliament in December.

Later, Facebook took the cue from a popular phrase “When you can’t beat them, join them” and pitched in with a $5.7 billion (around Rs 43,574 crore) cheque for a 10 per cent stake in Jio Platforms, valuing it’s equity at $57 billion. One would wonder the need for such a hurried deal in midst of a pandemic. That said the deal seems to be a win-win for both. On one hand, it would help RIL reduce its debt, and on the other, will provide a steady and growing set of users and database to Facebook.

To start with, together they will tap a huge opportunity that has opened up in grocery retail in India due to Covid-19 pandemic. In the last few years, 'mom and pop' grocery or kirana stores were in the twilight zone, with the foray of large format supermarts as well as the online grocery stores. The last few weeks have given these Kirana shops a new lease of life and a coveted position in the neighbourhoods, as they seem to be the only source for essentials in this moment of crisis caused by the pandemic. Most supermarts are either shut or operating at reduced capacity. The supply and delivery chains of the online grocery stores seem to have gone for a toss resulting in customer heartburns. This could be the right time to empower Kirana shops with a supply chain, technology and the reach to provide the customers in the respective neighbourhood a seamless experience.

A major advantage in this format would be negligible delivery costs, along with quality products at attractive price points comparable to the supermarts as well as the online stores. And to roll this out, probably it’s the most opportune time. Having secured the customers, the group could backward integrate to be at almost every point in the agri-food ecosystem. Going forward Reliance would also leverage other online platforms of Facebook to push the retail brands in the group.  

However for the Group, the path ahead may not be as smooth. The earnings for the March 2020 quarter (Q4FY20) would have disappointed analysts with net profit dropping due to extraordinary charges, including inventory losses.  The announcement of a rights issue at Rs 1,257 in the ratio of 1:15 for the existing shareholders garnering Rs 53,125 crore, the first in three decades, could be an indicator that the much publicised deal with Saudi Aramco for their refining and petrochemical business is possibly hitting a road block as the ‘oil economies’ are in doldrums. Reliance, however, has stated that the due diligence is on track.

Despite this, it will still need to raise funds for expansion of the new-age business since the cash flows from traditional business may not suffice. With the record low oil prices, RIL’s refining margins will take a hit if one takes a cue from Singapore refining margins that have crashed, though the company has long track record of a substantial premium over Singapore refining margins.

Even in Q4FY20, RIL managed a gross refining margin of $8.9/barrel (bbl), premium of $5.7/bbl over Singapore. However, Singapore refining margins have dipped to $1.2/bbl lately.

Barring the June 2020 quarter, the next few quarters could see a gradual revival of demand for fuel as well as petchem products. However, the other retail brands such as Reliance Brands (which houses many international brands), Reliance Digital and Reliance Trends etc. that depend on discretionary spends, could take much longer to bounce back.

Reliance Jio (RJio) could be the lone bright spot as individual data usage has spiralled, thanks to rise in online entertainment and ‘work from home’ (WFH). This could be a permanent change leading to higher per capita usage as well as Average Revenue Per User (ARPUs). The ARPUs for Q4FY20 stood at Rs 130.60 with a 42 per cent rise in earnings before interest, taxes, depreciation and amortisation (EBITDA). The ARPU should head towards Rs 200 in the next few quarters, as the demand would remain inelastic being an ‘essential commodity’

The next few quarters will be crucial to see how Mukesh Ambani balances the ship. The new-age businesses, such as the telecom and retail, will need capex whereas the traditional businesses of refining and petchem may not generate the required cash flows like in the past. If Saudi Aramco backs out from the proposed deal, we could see further equity dilution of the new-age businesses to garner cash.

The rights issue doesn’t seem very attractive, especially in view of the latest earnings that could result in a price correction. Rs 1,000 per equity share (for the rights issue) may have been a decently attractive level. All in all, if the group is able to increase shareholder wealth like it’s been doing decade after decade since its initial public offer (IPO) in 1977, Mukesh Ambani would have truly lived up to his reputation.

(Ambareesh Baliga is an independent market analyst. The views are that of the author and have no bearing or reflection on Business Standrd view/s)