RIL's net debt likely to moderate in next few quarters, say analysts

Reliance Industries’ (RIL’s) net debt, which has been on the rise for the last six quarters, could peak in the current financial year amid moderation in capital expenditure (capex), analysts have said. However, any fresh investments in the new energy business would be key for the company’s debt numbers, they added.

RIL’s consolidated net debt stood at Rs 1.27 trillion as of the June 2023 quarter, up marginally on a sequential basis.

“Net debt of Rs 1.27 trillion was flattish, with gross debt also flat vs Mar ’23 levels – suggesting a welcome improvement in operating cash flows and some moderation in capex intensity over the previous quarter,” analysts at ICICI Securities said.

Analysts at JM Financial said concerns over RIL’s debt were overdone. “We expect RIL’s net debt to peak in FY24 and then decline gradually as capex will not only moderate but, importantly, also be fully funded by a gradual increase in internal cash generation,” they said in a report on RIL, released on Monday.

JP Morgan noted that RIL’s capex in the current cycle should peak in FY24, and spending in both Reliance Retail and Jio should be lower in FY25, likely driving debt lower.

Morgan Stanley held a similar view, saying RIL’s capex might peak over the next few quarters. “RIL monetisation cycles are becoming shorter (2-3 years vs 5-6 years in the past), while investments in new growth areas accelerate,” analysts with Morgan Stanley wrote in a July 23 note.

For the first quarter this financial year, RIL’s capex was Rs 39,645 crore. In the previous financial year, RIL spent Rs 1.41 trillion as capex. Analysts pointed out that the June-quarter capex was at a higher rate compared to the last year’s quarterly average.

Others such as Ambit Capital expect newer businesses to add to RIL’s capex numbers going forward. “After increased capex and debt driven by retail and Jio in FY23, we think that new energy capex would intensify in FY24-25,” they wrote in its post-earnings note on the company.

Analysts with Nuvama, listing risks for RIL in a note, said, “RIL has allocated Rs 7,500 crore for new energy capex. This shall not strain its balance sheet for now. In fact, we reckon RIL would remain net debt-neutral in the near term. But, given the capital-intensive nature of new energy and RIL’s plans to quickly become world-scale, we argue capex could rise multi-fold — as seen in the case of Jio Digital.”

Analysts have also stated the Street will watch out for more details on the new energy business at the next annual general meeting of the company.

The company’s gross refining margins (GRMs), an indicator for RIL’s refining business, may remain flattish, analysts said.

Analysts with ICICI Securities estimated GRMs for Q1FY24 at $12.3 per barrel.

RIL discontinued sharing GRMs as a separate data point in FY21.

“Reliance saw its oil-to-chemicals (OTC) segment performance weaken in Q1, with our estimates suggesting a $3 per barrel sequential dip in GRMs and flattish petrochemical margins,” the analysts wrote in a note, adding that they assumed flattish GRMs for the company during FY24-FY25.