When billionaire Mukesh Ambani, chairman and managing director of Reliance Industries Ltd (RIL), begins his address at the company’s 42nd annual general meeting (AGM) on Monday, shareholders will be waiting for plans to tackle total liabilities pegged at $65 billion by brokerage Credit Suisse.
A large portion of the debt has accumulated over the years as RIL diversified into consumer-focused businesses in retail, telecom and e-commerce, apart from its core refining and petrochemicals businesses. This year, shareholders and analysts expect the formal launch of Jio’s fiber broadband venture, with details on pricing and roll-out plans. Over the years, Ambani has used the AGM as a platform to announce the group’s mega plans.
RIL’s rising debt is emerging as a key concern for investors. In the last fiscal year, the company’s finance cost more than doubled to ₹16,495 crore from ₹8,052 crore in the previous year.
“The increase was primarily on account of the commencement of digital services business, petrochemical projects at Jamnagar and higher loan balances," RIL said in its annual report. The company made a capital expenditure of more than ₹1.32 trillion in the last fiscal year. It ended the year with a gross debt of more than ₹2.87 trillion. In the June quarter, RIL reported gross refining margin of $8.1 per barrel while its petchem production declined 10% quarter-on-quarter.
A RIL spokesman said the company will elaborate on its plans on Monday at the AGM.
In a 5 August report, Credit Suisse downgraded RIL’s stock to underperform from neutral and slashed its target price. The brokerage said given RIL has been free cash flow (FCF) negative for six years and facing margin pressures in refining and petrochemicals, FCF is likely to be negative for FY20-21 as well.
RIL’s total liabilities have already climbed to $65 billion in FY19 from $19 billion in FY15, comprising 40% of its enterprise value. Total interest cost has risen to $4 billion in FY19 from $1.2 billion in FY15, according to its annual report.
“At the AGM, we expect a formal launch of Jio’s fiber broadband venture with details on pricing and roll-out plans. We also expect further details on Reliance Retail’s ‘New Commerce’ plans and potential roll-out dates. We could also get a peek on RIL’s next leg of growth plans across real estate, petchem and refining, though immediate steps are unlikely," said JP Morgan in its report dated 5 August.
RIL’s pilot phase for fiber broadband is underway for over two years and analysts expect the company to elaborate on commercial launch timeline and pricing. Jio is expected to roll out broadband services in three key offerings – base-pack (broadband only), bundled pack (broadband + TV offering) and high-end converged pack with the Internet of Things (IoT) devices where a consumer could control security, light and kitchen appliances etc. A landline phone would likely be a free add-on just the way free voice comes with the cellular service.
RIL has maintained that it is looking to target 50 million households for its fiber broadband product.
RIL is also expected to launch JioPhone 3, the successor to Reliance JioPhone 2, with better specifications and features. Since Jio’s debut, RIL has launched two smart feature phones which offer 4G mobile internet and access to popular apps such as YouTube and WhatsApp.
RIL’s retail business, on the other hand, may see its new avatar this fiscal with analysts expecting the company to announce its e-commerce venture at the AGM. Reliance Retail has achieved massive scale with over ₹2 trillion in revenues expected in FY21 and has become a self-funding engine.
RIL has spelt out a four-step strategy for sustained growth in retail: one, continued expansion in physical stores – store addition rates of three per day during the first quarter of this fiscal; two, integrate online-offline channels – touted as a strategy to counter global retail heavyweights such as Amazon and Walmart; three, strengthen brand portfolio wherein it continues to add global brands not present in India to gain first-mover advantage and improve customer experience.
Despite the growth in telecom and retail segments, which have helped offset the slowdown in its refining and petrochemical businesses, the RIL stock has underperformed markets.
“RIL has underperformed the Nifty by 11% over the last 3 months. In a muted global growth environment, the core business is unlikely to drive a material upside surprise to earnings and hence the stock price. A telecom tariff hike would be a positive, but arguably some of it is already built into sell-side and investor expectations. Jio FTTH, New Commerce launches are unlikely to reverse the underperformance," added JP Morgan.