Reliance Group says it is not the most indebted conglomerate

Mumbai: Anil Ambani’s Reliance Group wants to set the record straight that it isn’t the business house with the largest outstanding debt in the country. News reports on the loan burden of Indian business groups often refer to Credit Suisse’s well known House of Debt report, where Reliance Group features as the group with the highest debt. The conglomerate’s version is that this is an unfair depiction of its debt situation.

First published in August 2012, the Credit Suisse report lists 10 business groups that have stressed assets and whose debt has grown at a brisk pace. In an update last year, based on FY15 financial numbers, Credit Suisse put Reliance Group’s debt at ₹ 1.25 trillion, making it the group with the highest outstanding debt among the 10.

Reliance’s version is that it is fairly well capitalised and has sufficient assets created against its debt. “Reliance Group companies have strong capitalisation, and have created assets of much larger magnitude than their peer groups across various infrastructure sectors. For instance, Reliance Infrastructure Ltd has the lowest leverage ratio and strongest balance sheet amongst its infrastructure peers,” said Amitabh Jhunjhunwala, group managing director.

According to Jhunjhunwala, scrutinizing debt at the group level doesn’t make much sense, but a sectoral comparison of each company in the Reliance Group will help draw better conclusions. Based on such an analysis, he said that while Reliance Communications is more leveraged than it should be, other group companies are in a reasonably healthy position vis-a-vis peers.

While this is true to a large extent, the fact remains that bankers do closely watch debt at the group level, because of direct and indirect linkages between group firms. Besides, the stock markets haven’t taken a very generous view of the financial health of group companies. Each of the group’s top four companies trade at a fraction of their respective peaks in 2007-08. In early 2008, these companies had a combined market capitalisation of ₹ 3.32 trillion, which has now fallen to ₹ 50,000 crore, down 85%. The Nifty Infrastructure index has fallen by 56% from its peak in early 2008.

Strictly speaking, the Tata group would have the highest outstanding debt in the country. As of March 2016, the Tata group would have a gross debt of over ₹ 3 trillion and a net debt of over ₹ 2 trillion, owing to the high level of indebtedness of its European steel operations and its domestic telecom business. The reason Credit Suisse hasn’t listed the Tata group in its report is that although its overall debt is high, the pace of increase hasn’t been as high in the years for which it did its survey.

Reliance Group’s gross debt has increased by 4.8 times between FY07 and FY15, according to the House of Debt report, while that of the other nine groups has increased by as much as 8.2 times. Besides, at a group level, the Tata group’s leverage metrics and cash generation profile were far better than the House of Debt groups. And if push comes to shove, the group can always sell a small stake in Tata Consultancy Services Ltd to retire debt in some group firms.

Also, to be fair to Credit Suisse, it hasn’t run down Reliance Group because of the overall size of its debt. In fact, in its October 2015 report, the group is listed as among the top three in terms of the least amount of debt under high stress (around 20% versus 46% for the other nine groups). This referred to debt in its power business, which was classified as high stress because of the low tariff in the Sasan plant and the fact that the Chitrangi project had seen a 35% cost overrun. Both are located in Madhya Pradesh.

The other groups listed in the broker’s report are (in the order of the highest-lowest amount of stressed debt) Lanco Group, Jaypee Group, GMR Group, Videocon Group, GVK Group, Essar Group, Adani Group, JSW Group and Vedanta Group.

Jhunjhunwala said that the group has created strong capitalisation across businesses and that is providing balance sheet stability and opportunities to pursue growth. “Reliance Group has created significant assets compared to the debt outstanding,” he said.

“Reliance Group is amongst the top three in terms of low gearing,” Jhunjhunwala added. He was referring to the gross debt to equity ratio of 1.3 with a net-worth of ₹ 85,690 crore. The Tata group also has debt-equity ratio of 1.3 with a net-worth of over ₹ 2 trillion.

But on the important debt-Ebitda ratio, the Tata group sits pretty with a ratio of 1.7 times, compared with Reliance Group’s leverage of 6 times Ebitda. This is based on net debt for non-financial companies in the group and Ebitda for FY16. Ebitda is earnings before interest, tax, depreciation and amortization.

Jhunjhunwala claimed that Reliance is one of the few groups which is actively engaged in deleveraging and further strengthening individual company balance sheets. To be sure, Reliance Group has been successful in selling a stake in its insurance business, has found a buyer for its cement business and is in advanced talks to sell its electricity distribution and telecom towers businesses.

In December, 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 the buyers can walk out of the deal without a penalty. The deal now largely depends on the outcome of the deal to merge the company’s wireless business with Aircel. “Reliance Power Ltd has the lowest leverage amongst private sector power companies, and is amongst the three highest placed companies on its interest coverage ratio,” said Jhunjhunwala.

“Likewise, Reliance Capital Ltd has the highest net worth and lowest gearing in the NBFC (non-banking finance companies) peer group,” he said.

According to an analyst with a multinational brokerage, one of the reasons Reliance Capital’s leverage is low is that about a third of its book has been used to buy stakes in subsidiaries and other group companies.

In November, Reliance Infrastructure 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). Though the deal has been signed, the money is yet to flow into Reliance Group. Jhunjhunwala said the deal will fetch the company ₹ 10,000 crore.

On 5 November, Reliance Infrastructure said it will exit its cement and roads business. The cement business is being valued at ₹ 5,000 crore. Again, there have been delays and a deal hasn’t been concluded. The group is also in talks to exit its roads portfolio, in which the company has invested ₹ 8,800 crore. Jhunjhunwala expects the sale to generate another ₹ 9,000 crore.

If each of the said deals proceeds as expected, Reliance Group will be in a far better position by the end of FY17. But as far as conclusion of deals go, the track record thus far has been sketchy. Jhunjhunwala, however, said all the deals are expected to be completed soon. Many consultants declined to comment on Reliance Group’s efforts to deleverage as they had not studied its financial ratios in comparison with those of other conglomerates.

Harish H.V., partner at advisory Grant Thornton India Llp, said he could not comment on Reliance Group’s indebtedness compared with other groups as he had not studied the numbers and ratios. However, he said that divesting assets, making assets generate cash and restructuring debt are options before conglomerates to reduce leverage.

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.