RIL's debt rose to  ₹3.3 trillion as on 31 March 2019, increasing 16% compared to the debt as on 30 September 2018. (Vipul Sharma/Mint)
RIL's debt rose to 3.3 trillion as on 31 March 2019, increasing 16% compared to the debt as on 30 September 2018. (Vipul Sharma/Mint)

Why investors aren't thrilled about Reliance deleveraging manoeuvre

  • Reliance Industries has reduced its debt by transferring Reliance Jio's fibre and telecom tower assets, and liabilities to two InvITs
  • RIL is planning stake sales in its refining business and Reliance Jio to Saudi Aramco and SoftBank, respectively, to cut its massive debt

Mumbai: When Reliance Industries Ltd (RIL) announced its March quarter (Q4) results last week, one thing stood out—significant reduction in its reported debt. As the chart above shows, RIL’s consolidated net debt declined to 2 trillion as on 31 March, from 2.8 trillion as on 30 September.

This debt reduction is owing to the transfer of Reliance Jio Infocomm Ltd's fibre and telecom tower assets, and liabilities to two infrastructure investment trusts (InvITs).

But investors aren’t impressed. RIL shares are where they were just before the Q4 results were declared on 18 April.

What gives?

This is “an optical deleveraging," point out analysts at Kotak Institutional Equities.

Analysts at Citi Research in a report on 21 April say, “The debt reduction may appear optical until external investors come in."

In fact, as the chart shows, on a comparable basis, RIL’s consolidated net debt (including capex creditors, deferred spectrum liabilities and fibre/tower liabilities) has risen to 3.3 trillion as on 31 March 2019, increasing 16% compared to the debt as on 30 September 2018. It has in fact increased by as much as 40% year-on-year. The trends seen for RIL’s telecom venture debt, too, are similar to its consolidated performance.

Little wonder that investors aren’t as thrilled. Plus, the Reliance Industries stock has already appreciated more than 40% in the last one year, suggesting a good portion of the upsides from Reliance Jio and Reliance Retail have been factored into the share price.

Now that the InvITs have been created, the impact on Reliance Jio’s profit and loss (P&L) account needs to be watched as well. Analysts expect operating costs to increase, given that Reliance Jio will have to pay rentals to use the telecom assets. Therefore, the June quarter results will offer more clarity on the P&L impact.

For investors, with the refining business environment expected to remain muted, the main theme surfacing for RIL is that of balance-sheet deleveraging. Recent reports indicate that the company is taking steps in that direction. Saudi Aramco is said to be in serious discussions to buy as much as 25% in the refining and petrochemicals businesses. Further, Japan’s SoftBank Group Corp. is reportedly looking to invest $2-3 billion in Reliance Jio.

Even so, the deleveraging plans send another disconcerting message.

“Potential deleveraging by RIL in any shape or form (downstream stake or Jio/retail strategic stake? Or treasury stock?) may rule out an easing of pricing in the telecom sector anytime soon," point out Kotak analysts in a report on 18 April.

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