Photo: Reuters
Photo: Reuters

As RIL’s drive to pare its debt gathers pace, capex takes back seat

  • Jio’s capex fell to 3,000 crore, marking the first quarter when the telco’s capex was lower than its cash profits
  • Analysts say RIL has turned free cash flow positive for the first time since the Dec quarter of FY13, with capex declining by 27% q-o-q

MUMBAI : Some debts are fun when you are acquiring them, but none are fun when you set about retiring them," said the US poet Ogden Nash. To Reliance Industries Ltd’s (RIL) credit, it has begun the arduous task of paying off its mammoth loans in earnest.

On Friday, when RIL announced its December quarter earnings, it said consolidated net debt has reduced sequentially by 4,104 crore to 1.53 trillion.

That might seem like a drop in the ocean, but also note that capital expenditure (capex) has consistently declined for the fourth quarter. Overall capex dropped to 14,015 crore, a sharp fall from the average quarterly spend of about 33,000 crore in the previous fiscal.

Analysts from Kotak Institutional Equities said in a 19 January note that RIL has turned free cash flow positive for the first time since the December quarter of FY13, with capex declining by 27% quarter-on-quarter to 14,015 crore in the three months ended 31 December, now below reported cash profit of 18,511 crore.

Notably, capex in the telecom unit, Reliance Jio Infocomm Ltd, fell to 3,000 crore. This marked the first quarter when Jio’s capex was lower than its cash profits.

RIL had said at its annual general meeting last year that it would be net debt-free by March 2021. While an increase in free cash flow will help cut debt, strategic sales of the fibre business and the Saudi Aramco deal, where Reliance intends to sell 20% stake in its petrochemicals and refining businesses, are critical.

News that the Centre asked courts to intervene last month, seeking to restrain the firm from disposing of its assets, has led to some concern about the deal concluding soon.

At Reliance’s December quarter press conference, joint chief financial officer V. Srikanth said: “It (Saudi Aramco deal) will not be a deal which will be done by this fiscal-end. It’s a large cross-border and complex transaction. Once the definitive agreements are done, we can comment on it."

Graphic: Sarvesh Kumar Sharma/Mint
Graphic: Sarvesh Kumar Sharma/Mint

At its annual general meeting, Reliance had said it expected to complete this transaction within FY20 subject to definitive agreements, due diligence, regulatory and other customary approvals.

“As long as the deal gets done, investors would take some delay in their stride," two analysts said on condition of anonymity. The fibre deal, on the other hand, will reportedly get announced sooner.

RIL’s performance was soft in key segments such as refining, petrochemicals and telecom, with only the retail business shining bright. Gross refining margin of $9.2 a barrel is at the lower end of analysts’ estimates.

The petrochemicals business disappointed, with earnings before interest and tax (Ebit) declining 28.5% year-on-year. The firm attributed this to the significant decline in margins to near trough level for most products, as a result of new capacity, inventory overhang and global demand slowdown.

Jio’s revenue grew 6.4%, which seems low considering it had two tailwinds last quarter in the form of incremental revenue from its IUC top-up recharges and a spurt in Jio Phone subscribers. IUC refers to interconnect usage charges paid to connect to rival telcos; Jio had introduced top-up recharges to recoup these charges.

It told analysts that the new charge had led to an exit of a certain type of subscribers, who had an unusually high use of outgoing voice calls. But as a result, the gap in Jio’s revenue growth vis-a-vis its competitors will reduce significantly in the December quarter.

In the retail business, Ebit increased sharply by 58% year-on-year and 17% sequentially. Ebit margin widened to 5.3% from 4.9% in the September quarter and 4.2% in the quarter ended December 2018. This was driven by robust store productivity, portfolio mix and operating efficiencies.

The Reliance stock has come off a bit from its 52-week high. Still, investors are sitting on handsome gains. “We believe stock performance in CY20 will be driven by progress on the key deleveraging transactions," wrote analysts from JPMorgan India Pvt. Ltd in a report on 8 January.

“We think investors would like to see completion of the various deleveraging transactions (refining stake sale, completion of InvIT transactions, strategic investors in Jio/Retail) that RIL initiated in 2HCY19 (and which drove the sharp stock rally from August 2019 of 30% vs 9% for Nifty)."

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