Reliance Industries is apparently net debt free, but in reality it is not

Reliance Industries Ltd (RIL) announced that it has become net debt free. In March 2020, the company reported net debt of ??1.61 trillion ($ 21 billion). Since then, he has raised $ 15.2 billion by selling stakes in Jio Platforms Ltd. Its $ 7 billion rights issue was 1.6 times oversubscribed.

Although the fundraising is unprecedented, the fact remains that approximately three-quarters of the proceeds from the rights issue will not be received until the next fiscal year. The issue was structured such that investors only had to pay 25% of the value of the shares they requested, with the remainder expected in two installments during fiscal year 22.

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Graphic: Satish Kumar / Mint

Investments in Jio Platforms have yet to be received, but analysts expect the funds to arrive during this fiscal year.

A sale of a stake to BP for the petro-retail joint venture (JV) is also expected to be completed in fiscal year 21 and will bring ??7,000 crore for the kitten. Given the company’s stated intention was to reduce its reported net debt to zero by the end of FY21, there is still a long way to go to meet the goal. It may be more appropriate to say that RIL’s reported net debt is on its way to zero.

Either way, it’s important to remember that there is already a significant gap between RIL’s reported net debt and estimates of its net debt by rating agencies and brokerage analysts.

Analysts from CLSA, Bernstein, Kotak Institutional Equities, Goldman Sachs and Nomura have valued the company’s net liabilities between ??2.4 trillion and ??$ 2.6 trillion in FY20.

They included deferred spectrum liabilities and investment creditors to arrive at their estimate of net debt. Some analysts also add the debt transferred to the Fiber Investment Trust (InvIT) and end up with an even higher net liability.

Even so, the scale of fundraising is substantial and RIL’s debt will decrease significantly.

If the $ 15 billion deal with Saudi Aramco goes through and the company can find a sponsor for InvIT fiber, it may end up being debt free even on the books of analysts and rating agencies.

But RIL is known to deploy a “high debt, high liquidity” strategy. This helps to keep his investment options open.

As such, he may well hold onto much of the money from new asset sales, rather than paying off all of his creditors.

Given the company’s fairly comfortable position on the net debt front, it’s no wonder that RIL shares have hit new record highs and its market capitalization surpassed $ 150 billion, India’s top company to reach this milestone.

RIL might not be exactly a debt-free company, but the over-indebtedness has clearly disappeared from its actions.

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Ann J. Cox