ril: Rights issue could make RIL net-debt free by March 2021

Mumbai: Reliance Industries’ proposed rights issue could help the Mukesh Ambani-controlled oil, technology and retail conglomerate reduce debt and create a buffer to cushion the impact of Covid-19 pandemic on businesses, analysts said.

The rights issue is likely to help RIL achieve its zero-net-debt target by March 2021, even if there are delays in proceeds from Saudi Aramco and Facebook deals, as per ETIG calculations. RIL can raise around ₹41,000 crore from the right issue if it dilutes 5 per cent of equity at 10 per cent discount to the current market price, ETIG estimates show. Morgan Stanley estimates that a rights issue with 2 per cent new shares at 5 per cent discount to the current market price would help RIL raise about $2.3 billion (₹17,500 crore). RIL can raise about $13.8 billion (₹1,04,000 crore) by issuing 12 per cent of new shares at a discount of 5 per cent to market, Morgan Stanley’s calculations show.

Centrum Broking believes Reliance Industries could raise ₹16,600-35,600 crore if equity dilution is between 2.5 per cent and 5 per cent, and it is priced at 20-25 per cent discount to the current market price.

A 5 per cent equity dilution means every shareholder will get five shares for every 100 they hold. At the end of December 2019, the Mukesh Ambani family held 50.03 per cent in RIL, followed by foreign portfolio investors with 24.51 per cent while the remaining was held by mutual funds and others.

An analyst with a leading domestic brokerage said that the consensus fair value of the company’s stock is around ₹1,600-1,700 per share. This means the rights issue, if priced at a discount of 8-10 per cent, could attract investors’ interest. Shares of Reliance Industries ended flat at ₹1,429.95 on Tuesday after initially falling in a strong market.

Morgan Stanley also said the rights issue announcement is a surprise given the recent deal with Facebook and declining capital expenditure. It expects the rights issue would reduce focus of investors on asset divestments. It estimates the rights issue would be earnings accretive by 0.1-2.6 per cent as it lowers debt of $41 billion (₹3,11,900 crore) post the Facebook deal.

RIL had announced last year plans to become a zero-net-debt company by March 2021. It had also announced that it was in talks with Saudi Aramco to sell a 20 per cent stake in oil and gas business for about $15 billion (₹1,14,000 crore). The sharp drop in global oil prices this year and the demand compression in most global economies could make an Aramco deal difficult, some analysts say.

Last week, social networking giant Facebook said it would be investing ₹43,574 crore ($5.7 billion) in Jio Platforms, a wholly-owned subsidiary of Reliance Industries, for a 9.99 per cent stake on a fully-diluted basis.

RIL’s projected free cash flow from core energy operations might shrink in the coming quarters as regional gross refining margins (GRMs) fall to multi-year lows. Every dollar change in the company’s GRM and every $25 per tonne change in petrochemical realisation impact RIL’s operating profit by 4 per cent, according to Kotak Institutional Equities. The consensus 12-months forward earnings per share has been pruned by 12.7 per cent to ₹81.65 since the first day of the lockdown.

“The Facebook-Jio deal has helped them to deleverage a little bit and now the rights issue can help them bring down debt further,” said Rajiv Sharma, head of research at SBICAP Securities. “Because of the drop in crude prices the core business could see some pressure this fiscal… the company had plans to significantly de-leverage but because of sharp drop in crude there are concerns in the market surrounding the Aramco deal and possible delays.”

“Reliance is currently a best run refinery and for investors it’s a very good opportunity to own the shares at discounted price,” said Sanjiv Bhasin, director, IIFL Securities. “For the company, it’s a smart move to raise capital at this juncture and prepare well in advance for the next leg of growth,” he added.

Reliance Industries had net debt of ₹1.53 lakh crore at the end of the December 2019, according to the company’s presentation. Typically, ‘AAA’- rated companies raise money from the debt market to meet their cash flow mismatch.

Reliance Industries may avoid any incremental debt because it will increase its debt burden. Therefore, money raised through rights issue (or the equity route) appears to be the most plausible course of action in the current situation.

According to Bloomberg, RIL has debt repayment of ₹36,625 crore and ₹45,498 crore for 2020 and 2021 respectively. Along with this, the company is likely to incur capital expenditure of ₹50,161 crore and ₹47,355 crore in FY21 and FY22, according to Bloomberg consensus’s estimates. These have prompted the company to raise funds via right issue for the first time in 29 years.