Deleveraging to boost RIL stock's performance

The promise of higher dividend payouts in future will enhance its attractiveness

Mukesh Ambani announced a game-changing set of initiatives at the Reliance Industries (RIL) Annual General Meeting (AGM). The subsidiary, Reliance Jio Infocomm (RJIL), will roll out commercial fixed broadband services from September. Reliance hopes to pick up 20 million home subscribers and 15 million business establishments, based on advance registrations. 

It is looking at a partnership with Microsoft’s Azure Cloud services to drive new offerings to SMEs and large enterprises. It’s also looking at the Internet of Things (IoT) market where it estimates an annual revenue opportunity of Rs 20,000 crore. Ambani also mentioned a blockchain initiative without offering details. 

Reliance will fight its usual price war by cutting tariffs in broadband and cloud-based services. It will offer an integrated bouquet of entertainment options to home broadband users, along with set-top boxes, and bundle LED TV sets to committed subscribers as well. 

Ambani also spoke of deleveraging. The investment cycle is supposedly nearing its end at Jio. RIL may tie up two key deals this fiscal, to cut debt considerably. Saudi Aramco could take 20 per cent stake in the oils-chemicals core business of RIL at an enterprise value of $75 billion. Aramco says this deal is currently based on a non-binding Letter of Intent and due diligence is in the early stages. There are obvious synergies between a major oil producer and one of the world’s largest refiners. The deal implies $15 billion worth of assets will be sold to Aramco. In addition, British Petro­leum will buy 49 per cent of Reliance’s petroleum retailing business, for around $1 billion, or Rs 7,000 crore. 

The towers and fibre assets have been spun off into an infrastructure investment trust and RIL could sell stakes there to raise more cash as well. It is also looking at listing the retail arm and Jio, within the next five ye­ars, and it will look for “value-unlocking” of real estate and financial assets. 

Overall, RIL intends to be debt–free in 18 months. In financial year 2018-19, RIL’s gross debt was estimated at Rs 2.88 trillion, including stand-alone gross debt of Rs 1.62 trillion, with the rest in key subsidiaries such as Reliance Jio (Rs 670.18 billion), Reliance Holding USA (Rs 34,848 crore), Rel­iance Retail Group (Rs 12,832 crore), etc. Cash and marketable securities were at Rs 1.33 trillion, meaning net debt of Rs 1.54 trillion. The InVIT holds another Rs 70,000 crore or so of liabilities. 

The deals with Aramco and BP would bring in over Rs 1.15 trillion, apart from possible stake sales in the InVIT. The Aramco and BP deals would also lower RIL’s 2020-21 consolidated earnings by 9 per cent and operating cash flow would dip 14 per cent, according to Morgan Stanley. 

The market response was enthusiastic. The restructuring marks an about-turn in company policy. In the past six years, RIL has invested over Rs 5.5 trillion — far more than its cash profits, which is why debt has risen. Net interest outgo hit Rs 26,700 crore in 2018-19, about Rs 10,000 crore more than in 2017-18. Cash flow is tight – crude payments outstanding run close to 120 days, which indicates that RIL really needs the Aramco deal, which includes an agreement to process 500,000 barrels of Aramco crude a day. 

RIL will have to rejig its corporate structure by moving the oils-chemicals business into a separate company for the Aramco deal. This means that RIL, in effect, becomes a holding company with standalone revenues on­ly from Exploration & Production, wh­i­le holding stakes in subsidiaries like telecom, retail, entertainment, refining and marketing of petrochemicals, etc.  

The oils-chemicals business provides the bulk of profits. But it’s a commodity business with an operating profit margin (OPM) of 10-11 per cent. Reliance Retail has an OPM of 4-5 per cent. Media lost money in 2018-19. Jio has an operating margin of 38-39 per cent. That margin may drop as new telecom segments come on-stream, but this could mean a surge in topline and lower debt would mean better net margins. 

Holding companies get lower valuations than standalone businesses. The listing of Jio and Retail would lead to a rise in valuations if investors can wait for that. Deleveraging is good news for investors who were worried about rising debt. Ambani assured shareholders that higher dividends would be available in future. This may reverse the RIL recent underperformance vis-a-vis the Nifty.