Mumbai: Reliance Industries Ltd (RIL), India’s most valuable company, has shed around Rs12,382 crore of unsecured loans in 2009-10, paring its debt burden by almost 15.5%, according to the oil-to-yarn and retail conglomerate’s latest annual report.
The debt reduction—the first dip in the last four fiscal years—is in line with the management’s objective of reducing the firm’s high-cost debt as cash comes in from its Jamnagar refinery and the Krishna-Godavari D6 gas block. While the company reduced its unsecured debt by almost one-fifth, outstanding secured debt rose by around 9% in 2009-10 to Rs11,670 crore.
The Mukesh Ambani-controlled energy firm had unsecured loans worth Rs18,256.61 crore in 2006-07, which rose to Rs29,879.51 crore in 2007-08 and more than doubled to Rs63,206.56 crore in 2008-09.
The last fiscal showed a drop for the first time, which sector analysts say hints at the company’s intention of retiring debt in a “phased” manner. In fiscal 2010, RIL on a stand-alone basis reduced its overall debt burden by around Rs11,410 crore to Rs62,495 crore.
In an emailed response to Mint, an RIL spokesperson said: “Reliance Industries continues to pursue prudent financial management initiatives and strives to enhance value for all stakeholders” but stopped short of specifying if the company will continue to retire more debt.
Graphic: Ahmed Raza Khan/Mint
Other RIL executives in the past have been more categorical. Addressing shareholders in the annual general meeting in November, RIL chairman Ambani had said that “with a current cash balance of Rs19,421 crore ($4 billion), Reliance is among the financially strongest companies in emerging markets” and net debt was “at less than 21 months of cash flow”. “In 21 months, at this scale and size, Reliance has the potential to be debt-free,” he had added.
Earlier in May 2009, the Business Standard had reported, quoting an unnamed company official, that RIL planned to use its surplus cash to repay as much as Rs15,000 crore in fiscal 2010.
“Retirement of debt (secured plus unsecured) was an implied assumption. Given the expected cash flow of $20-25 billion (around Rs93,000 crore-Rs1.16 trillion) over the next three-four years and no clear business reinvestment plans, a phased payout of the loans is to be expected,” said Deepak Pareek, energy analyst with Mumbai-based Angel Broking Ltd.
Pareek was referring to the revenue pooling in from RIL’s newly commissioned 580,000 barrels a day refinery at Jamnagar and gas production from the KG basin, both of which commenced fully from April 2009.
Abbas Merchant, senior assistant vice-president, research, at Jaypee Capital Services Ltd, is of the opinion that unless RIL gets into any new projects or makes any acquisitions, it is likely to continue repaying debts over the coming quarters as well.
“The 2006 to early 2009 was the project finance stage. Both the refinery and KGD6 were guzzling cash, so the overall debt was expected to rise. This (after April 2009) is eating off the investment phase,” explained another Mumbai-based analyst with a foreign brokerage, adding that the unsecured loans could be more expensive.
Unsecured debt typically attracts higher interest rates than secured loans since it’s not backed by any collateral, and debt became more expensive globally in the aftermath of the financial crisis.
Mint could not ascertain RIL’s original cost of funds and the interest saved due to early repayment.
“During the year...RIL refinanced $800 million of its existing liabilities at a lower cost, resulting in savings in interest costs,” the annual report said. “The average maturity of the company’s long-term debt is around four years. The proportion of short-term debt to total debt is conservative at 9.5%.”
Analysts suggest that reducing its debt burden might be a trend that is likely to continue in the current fiscal as well.
“With the surplus cash in hand and proceeds from the sale of treasury shares, it is not surprising that RIL is looking to shed its borrowings,” said an analyst who did not want to be named as he is not authorized to speak to the media.
RIL’s 2009-10 annual report states that during the fiscal, the Petroleum Trust, which holds treasury stock of RIL that was formed as a result of Reliance Petroleum Ltd’s merger with itself, sold 88.8 million of these shares to raise Rs9,334 crore. Also, as per the cash flow statement of RIL, cash and cash equivalent assets on RIL’s balance sheet has dropped by Rs8,713 crore to Rs13,426 crore. Analysts believe the company might have used at least a part of this sum to repay outstanding debts.
The company posted a turnover of Rs2 trillion for fiscal 2010, up almost 37% from fiscal 2009, while the net cash from operations on its balance sheet improved 12.3% in the same period to Rs20,490.22 crore.
On the other hand, RIL’s capital expenditure in 2009-10 came down by 11.2% and stood at Rs21,943 crore, and its total long-term investments rose by 7.5% to Rs23,228.62 crore, implying more cash in the company’s coffers.
Following the debt reduction, financial parameters such as debt to equity ratio and net gearing, or the proportion of debt to the total available funds to a company by way of debt and equity, have significantly improved for RIL from fiscal 2009. One of the major reasons for this being that in 2008-09, RIL’s total outstanding debt had more than doubled from 2007-08 and stood at Rs73,904.48 crore.