Even as its profits and cash reserves have been growing over the years, a big overhang for Reliance Industries (RIL) has been a sharp rise in its gross and net debt. The group saw its net debt more than double from Rs 76,388 crore in March 2015 to Rs 1,57,236 crore by the end of September 2019.
While the proposed deal with Saudi Aramco to sell 20 per cent stake in RIL and the agreement with Brookfield to divest stake in its telecom towers are in the works, Wednesday’s announcement of sale of 9.99 per cent stake in Jio Platforms Ltd to Facebook for a consideration of $5.7 billion (over Rs 43,000 crore) came as a shot in the arm for the group that has been looking to reduce its debt.
Shares price of RIL jumped by 12 per cent on Wednesday, before closing at Rs 1,363 per share, with a gain of 10.3 per cent.
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A report by Morgan Stanley, which acted as the financial advisor to RIL and Jio Platforms Ltd in relation to the investment by Facebook Inc, said that the stake sale will “lower RIL’s net debt by 12 per cent and be 1.5 per cent earnings accretive. It could also drive a multiple re-rating as RIL multiples have previously re-rated 30 per cent during balance sheet deleveraging cycles.”
It also said that if all asset monetisation plans including holdings in energy, telecom and content businesses were to be consummated, “we estimate potential to lower RIL’s net debt and liabilities by 80 per cent, i.e. by $39 billion”.
Edelweiss, in its report on the Jio Platforms-Facebook deal, said, “The transaction allays the Street’s concern on RIL’s leverage and instils confidence in management’s target to achieve zero net debt by FY21. Synergies due to RIL’s partnership with Facebook are a known unknown and can drive a significant re-rating for the stock.”
There are some who say that RIL chairman Mukesh Ambani has been working towards a strategy that will not only bring down the group level debt significantly but will also insulate his enterprises from a number of perceived risks. While Facebook’s stake purchase in Jio Platforms has been announced, sources say that Saudi Aramco is currently doing its due diligence to pick up 20 per cent stake in RIL’s refining and petrochemicals business.
There are some who say that RIL Group is also working on bringing a large strategic investor in its retail business too. An investment banker, who did not wish to be named, said that RIL Group seems to be working towards safeguarding Ambani’s enterprise’s interest against any risk going forward by bringing in large strategic players into his businesses.
“Once you have built a big enterprise and the business reaches its maturity, it is good to encash a bit and also see that the business continues without any hassle going forward by roping in a large strategic investor. The deal with Aramco will just ensure that along with providing it with cash to retire some debt.” The banker said the deal will be a win-win for both partners and at this time Aramco needs RIL much more and it won’t find a better partner around.
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