RIL's net debt to fall despite struggling energy, retail demand and delay in asset sales

Billionaire Mukesh Ambani-led Reliance Industries Ltd's net debt will fall even if energy and retail demand struggles for six months and the planned asset sales are delayed, analysts said.

Also, 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.

With the outbreak of coronavirus impacting economies globally, RIL faces multiple challenges -- oil prices have declined along with a fall in global oil product demand as a result of the lockdown across India and multiple geographies, potential slowdown in fashion/electronics demand for its retail segment, slower monetisation of telecom investments, and still relatively high debt post the investment cycle.

Consequently, RIL's share price has dropped 21 per cent year-to-date, but still out-performed the market by 7 percentage points.

Morgan Stanley said the timing of normalisation is unclear, and every month of these challenges negatively affects RIL sales volumes across all its businesses.

But competition is struggling even more, and cyclical businesses could get more medium-term tailwinds as capacity growth globally slows.

Morgan Stanley said the decline in global energy demand and expansion in credit default swap (CDS) spreads for RIL, to 290 bps over the past month, have raised investor questions about the company's balance sheet leverage. "Per our assessment, RIL's net debt (including other liabilities) would remain stable in FY21, if the COVID-19 situation were to persist for six months and recover only slowly thereafter."
Its strong energy backed cash-flows should help gain market share faster in offline retail and telecom segments, as competition conserves cash, it added. "RIL's net debt will fall even if energy and retail demand struggles for six months and asset sales are delayed."