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Why Is Mukesh Ambani Putting Reliance Industries On A Debt Diet?

It’s no secret that Reliance Industries Ltd. needed to deleverage. The company, that invests in new businesses of scale approximately every five years, is nearing the end of a capex cycle that’s exceeded five years and Rs 5 lakh crore. More than half of that was funded by debt with Rs 80,621 crore due in repayments just this financial year.

Meanwhile earnings have been sluggish, falling in the quarter-ended March for the first time in four years, and doing marginally better in the April to June period.

The writing was on the wall then for RIL – sell assets to pare debt.

That Mukesh Ambani, promoter and chairman, chose to sell portions of core, or crown-jewel businesses—refining and petrochemicals—is also not surprising.

These businesses are facing short-term headwinds such as sanctions on Iran and Venezuelan oil, trade war repercussions, new China petrochemical capacities, as well as long term policy challenges such as the shift away from fossil fuels, the move to electric cars etc.

So, the recent stake sale to BP, in its fuel retailing business, and Monday’s announcement of a non-binding agreement for the sale of a 20 percent stake in its refining and petrochemicals business to Saudi Aramco may be just what the debt doctor ordered.

The two deals should bring in over Rs 1 lakh crore, cutting RIL’s net debt to Rs 50,000 crore approximately. An amount manageable for a company this size.

But Why The Long Sale List?

Curiously though, Mukesh Ambani has also decided to sell stakes in his new economy businesses, or the new crown jewels.

In his speech to shareholders at the company’s annual general meeting on Aug 12, Ambani said he hopes to sell stakes in Reliance Jio and Retail, in the next few quarters.

“We have received strong interest from strategic and financial investors in our consumer businesses, Jio and Reliance Retail. We will induct leading global partners in these businesses in the next few quarters, and move towards listing of both these companies within the next five years.”

Why, Ambani even spoke of selling real estate and financial investments, if needed.

Effectively, in one speech Ambani, who chooses his words carefully, announced substantial stake sales in the company’s cash cow or “annuity earnings” businesses, promised to sell portions of the new “growth” businesses, and spoke of evaluating “value unlocking options” in real estate and financial investments as well.

All this, he said, was to achieve a zero net debt position in 18 months. Very well. But won’t higher cash flow help too?

What About More Cash?

Because, in the same AGM speech Ambani listed several cash flow enhancement developments as well.

The consumer businesses have gained momentum, he pointed out. The contribution of Reliance Jio and the retail businesses has grown from 2 percent of consolidated EBIDTA in financial year 2016-17 to 13 percent in FY18 and nearly 32 percent in FY19.

With the telecom investment cycle complete and four new services to be launched at Reliance Jio, Ambani indicated an acceleration of cash flow from the business.

“Only marginal investments in access are now required to grow capacity to meet growing demand. This gives us tremendous OPERATING LEVERAGE and SUPERIOR RETURNS on our INVESTMENTS for years to come. While most of our investments are complete, we have so far fired up JUST ONE of the engines of revenue generation for Jio, namely mobile broadband. Even with one engine Jio has been profitable from its first quarter of commercial operations. And now we are ready to kickstart FOUR more engines of CONNECTIVITY REVENUE for Jio.”

So, the Jio cash machine should start ringing louder.

Besides, RIL just divested telecom infrastructure assets to trusts and signed up one investor, Canada’s Brookefield Asset Management, with many more to come before April, said Ambani.

Add to that the enhanced petrochemical capacity and subsequent earnings boost as that investment cycle ends.

And then there’s the gas production of 3 trillion cubic feet that will add $1 billion to EBIDTA every year, starting next year and for over a decade.

Then why is the company keen to sell stakes in its new crown-jewel business? What explains the rush? Doesn’t it signal distress to buyers?

The Rush To Zero Net Debt

There’s more than one possible answer.

Maybe, Ambani’s not keen to raise telecom tariffs as most analysts expected he would after a six-quarter decline in average revenue per user. He wants to keep burning cash till Jio has 50 percent market share.

Maybe, he’s seeking an aggressive valuation benchmark for his consumer businesses, in an effort to boost RIL’s weakened share price.

But those seem too trivial for this uncharacteristic asset sale rush.

Maybe, business is not as good as Ambani is making it out to be. But then he’s not the sort to shy away from plain-speak.

Maybe, Ambani is not confident about the success of the asset sales already in the works. After all, any deal can go bad in a minute and the one with Saudi Aramco is a non-binding one at this stage. But it’s most unlike RIL to announce a deal its not sure of.

There’s one more ‘maybe’.

Maybe, he’s playing ultra-conservative. Ambani is known for his acuity in foretelling economic cycles, investing ahead of the curve, and then reaping bountiful cashflow.

Ambani started this investment cycle in 2012 – a difficult year for business. He had then described the international business environment as “more challenging today than at any time in modern history”. The domestic environment, he said then, was impacted by high rates of inflation, adverse foreign exchange rate movements, continuing state subsidies for petroleum products and a slowdown in the rate of economic growth

And yet, his company was ready to put new money to work.

The mega-investment cycle has ended in 2019 – a year in which, according to Ambani, the domestic slowdown is temporary and the fundamentals are “very strong”.

And yet, he’s drawn up a long list of asset sales, including selling bits of his new crown-jewel businesses, and, if needed, even real estate and financial investments. All in 18 months.

The best of investors start moving to cash when things get tough. Especially when they know it’s going to get much worse before it gets better.―Bloomberg Quint

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