Asset sales may cut 40% of Reliance Group debt5 min read . Updated: 14 Dec 2015, 01:11 AM IST
Stake sales in financial services arm, plans to sell telecom towers, cement, road assets may net `50,000 crore
Mumbai: Anil Ambani-led Reliance Group could reduce debt by more than 40% if its asset sale plans go through without any hitches and if the funds raised are used to pare borrowings.
Stake sales in its financial services businesses along with plans to sell telecom towers, optical fibre, cement and road assets could net the group more than ₹ 50,000 crore. This is about 44% of the group’s outstanding debt of ₹ 1.14 trillion as of September 2015, according to Capitaline data.
If successful, it will also be the largest amount raised by any of the debt-ridden conglomerates this year. According to Credit Suisse, Reliance Group is among the top 10 indebted groups.
This list of 10 groups, in a Credit Suisse report titled House of Debt, also includes Lanco Group, Jaypee Group, GMR Group, Videocon Group, GVK Group, Essar Group, Adani Group, JSW Group and Vedanta Group.
The debt at these groups has risen seven times over the past eight years, according to Credit Suisse. Their loans add up to 12% of the loans in the Indian banking system and 27% of corporate loans.
With debt levels becoming unsustainable, many of these companies have been selling assets to repay debt.
Reliance Group, which has a presence across several sectors from telecom, power and infrastructure to financial services, media and entertainment, has been trying to exit non-core businesses while also selling incremental equity to existing joint venture partners.
Reliance Group is looking at a multipronged strategy with debt reduction as its principal goal, said Lalit Jalan, group director (strategy and corporate affairs).
Jalan said the conglomerate is focusing on an asset-light strategy, staying away from back-ended projects that will yield results over 20-30 years such as road development and entering new businesses such as defence, housing finance and renewable energy.
“The market is demanding quick returns and is not willing wait for long gestation period. Defence business has low gestation period and less capital intensive than sectors such as power and cement wherein we had invested around ₹ 1 lakh crore," Jalan added.
Last week, Reliance Communications Ltd (R-Com), part of Reliance Group, signed a preliminary agreement with Tillman Global Holdings Llc and TPG Asia Inc. for the sale of its telecom towers and optic fibre assets—a deal that may be worth as much as ₹ 30,000 crore. The agreement, however, is non-binding, which means that the buyers can walk out of the deal without a penalty.
On 16 November, Reliance Infrastructure Ltd said it intends to sell a 49% stake in its electricity generation, transmission and distribution business in Mumbai and adjoining areas to Canadian pension fund Public Sector Pension Investment Board (PSP Investments). Financial details of the transaction were not disclosed, but a person close to the development said the deal was valued at about ₹ 3,500 crore, Mint reported.
There is more up for sale.
On 5 November, Reliance Infrastructure said it will exit from its cement and roads business. The cement business is being valued at ₹ 5,000 crore, with the deadline for bids set at 24 December.
The group is also in talks to exit its roads portfolio, in which the company has invested ₹ 8,800 crore.
The group has also monetized its financial services businesses by selling additional equity to existing partners.
On 24 November, Reliance Capital offloaded a 23% stake in its life insurance joint venture for ₹ 2,265 crore to Nippon Life Insurance Co. In October, Nippon Life had also increased its stake in the asset management business from 35% to 49% for ₹ 1,196 crore.
Late last year, a few other deals had been announced by the group, including a transaction to sell its multiplex business, Big Cinemas, to Carnival Films. The deal was to help the group reduce debt by about ₹ 700 crore, Mint reported then.
“They are highly leveraged as a group and have tried to hold on for a long time and not sell things," said an industry consultant who declined to be identified.
“It is important to see of the remaining debt, which will still be large, what is the repayment cycle and how they manage to service it," he added.
The consultant added that the group’s recent expansion plans into sectors such as defence also need to be watched.
“...going forward I am very critical of sectors like defence which are heavily government policy-dependent," he said.
Reliance Infrastructure has applied for 28 industrial licences for making various parts of defence ships and planes. The business may be less capital guzzling when compared to industries such as power and cement.
The rush to sell businesses may be driven by the fact that the group was among those that have not been able to bring down stress on the balance sheet between 2012 and 2015, according to the updated House of Debt report released by Credit Suisse in October. The first version of the report was released in 2012.
“Debt levels for the Reliance Group have remained largely flat in FY15 (fiscal year 2015). Debt equity is reasonable at 1.1x, while debt/Ebitda remains high at 6.8x. 46% of group debt is in foreign currency," Credit Suisse report said, referring to Reliance Group.
Ebitda is short for earnings before interest, tax, depreciation and amortization and a debt-to-Ebitda ratio is a measurement of a company’s debt repayment abilities.
In September, at the annual general meeting of group firm R-Com, Reliance Group chairman Anil Ambani said that the imminent transactions will strengthen the balance sheet of R-Com. The company has adopted an asset-light model for the future, he said.
Addressing shareholders of Reliance Capital Ltd on the same day, Ambani said the finance company will continue to unlock value at appropriate stages through stake sales in different businesses and will continue to liquidate its financial investments in non-core areas, such as media, and expects to book attractive returns.
Ambani said the proceeds from all the monetization of assets will substantially be utilized to further reduce debt and strengthen Reliance Capital’s already conservative financial ratios.
Mumbai-based independent stock market analyst S.P. Tulsian said the market will treat the asset sales news as positive when the funds start flowing into the company.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.