How RIL plans to become zero net debt company

RIL’s debt stood at Rs 3.06 trillion as of December 2019, against Rs 2.87 trillion in March 2019.

Reliance Industries (RIL) said on Monday that its board would consider a proposal to issue equity shares to existing shareholders on a rights basis, during its board meeting on Thursday.

Analysts see the move as a bid to help the firm achieve its zero-net debt target, if other stake sale plans get delayed.

In a statement to the BSE, RIL said the firm’s board will meet on Thursday to consider and approve its March 2020 quarter and FY20 results, recommend dividend on equity shares, and consider a proposal to issue equity shares to existing shareholders on a rights basis, as may be permitted under applicable law, subject to such regulatory/statutory approvals, as may be required.

“We were not expecting a rights issue,” said an analyst. However, he added: “In the current global context and oil markets, the rights issue should be seen as a ‘Plan B’ if there is any delay for the stake sale to Aramco.

"This is the easiest way to achieve the zero-net debt target.”

The analyst expects dilution of 5 per cent through rights.

In other words, each shareholder will be entitled to apply for five new shares for every 100 shares held.

This will help RIL raise Rs 40,802 crore, assuming a 10 per cent discount to Monday’s closing price.

In August 2019, group chairman and managing director Mukesh Ambani told shareholders that RIL would be a zero-net debt company before March 2021.

RIL’s debt stood at Rs 3.06 trillion as of December 2019, against Rs 2.87 trillion in March 2019.

Net debt, as of December 2019, was Rs 1.53 trillion.

According to a Credit Suisse note, RIL’s net debt-to-equity ratio, as of March 2020, is expected to be 0.52x.

Last week, RIL announced Facebook would invest Rs 43,574 crore in Jio Platforms for 9.99 per cent stake.

With net debt of Rs 1.53 trillion, RIL still needs another Rs 1.1 trillion to meet its zero-net debt target.

So, the 5 per cent equity dilution may not fully help, and RIL may have to go for higher dilution.

Assuming a discount of 10 per cent, RIL will be able to get another Rs 81,600 crore from a rights issue, at the current market price, if it dilutes 10 per cent of its equity. It is yet to share details of the issue size.

RIL’s December quarter capital expenditure at Rs 14,015 crore was three-fourth of its cash profit that stood at Rs 18,511 crore, which gives an indication of the surplus cash it has for debt reduction.

As part of the debt-reduction measure, RIL plans to sell 20 per cent in its oil-to-chemicals (O2C) division to Saudi Aramco for $15 billion.

With the crash in oil prices, analysts have raised concerns over the timeline for completion of the deal.

Other plans include its Rs 25,215-crore deal with Brookfield group for the sale of 51 per cent stake in its telecom tower assets, through an investment infrastructure trust (InvIT).

RIL also plans to bring a strategic investor in its fibre assets InvIT.

In December 2019, RIL and BP agreed to form a joint venture, wherein BP will acquire 49 per cent stake in RIL’s retail fuel business for Rs 7,000 crore.