DECODING THE DE LEVERAGING STRATEGY OF RIL

• DECODING THE DE LEVERAGING STRATEGY
  RELIANCE INDUSTRY
  DE LEVERAGING THE EMPIRE
  BY NEVIN JOHN
  BUSINESS TODAY
  
  
• EXPANSION OF RIL

1. RELIANCE INDUSTRY LIMITED BUILT GIANT RELIANCE JIO AND EXPANSION THE PETROCHEMICALS BUSINESS BY CONSTRUCTING WORLD’S LARGEST REFINERY AND ITS DOWNSTREAM UNIT AND PARAXYLENE PLANT.
2. INVESTED HEAVILY IN RELIANCE RETAIL (LARGEST RETAILER) ,PROFIT BEFORE INTEREST AND TAXES  5546 CRORE.
3. INFORMATION SHARED BY RI CHAIRMAN MUKESH AMBANI  THAT THE COMPANY HAS INVESTED 5.4 LAKH CRORE IN FIVE YEARS
4. OUT OF WHICH 3.5 LACS CRORE WENT INTO BUILDING JIO AND ITS DIGITAL INFRASTRUCTURE WITH THE COUNTRY’S LARGEST OPTICAL FIBRE FOOTPRINT AND ANOTHER ONE LAC CRORES WAS INVESTED IN PETRO CHEMICAL EXPANSION.
5. INVESTMENT CYCLE FOR TELECOM IS COMPLETE AND ADDING OVER TEN MILLION NEW CUSTOMERS EVERY MONTH.
6. JIO ADDED 300 MILLION CUSTOMERS IN 2.5 YEARS
7. PETRO CHEMICALS EXPANSION COMPLETED IN 2017/18 AND RESULTED IN 86 PER CENT JUMP IN THE SEGMENTAL REVENUE OF 1.72 LACS CRORE IN 2 F.Y AND RISE OF PROFIT OF 148 PERCENT
8. DUE TO MASSIVE INVESTMENT GROSS DEBT HAS RISEN DRAMATICALLY IN THE LAST DECADE: SHOT UP BY 438 PERCENT TO 2.88 LAKH CRORE
9. NET DEBT STOOD AT 1.54 LACS CRORE

• IMPACT OF DEBT

1. THE DEBT IS NOW AT AN INFLECTION POINT GROSS DEBT IS 3.3 TIMES EARNINGS BEFORE INTEREST AND TAXES AND DEPRECIATION AND AMORTIZATION
2. NEEDS TO BE REDUCED THE COMPANY FINANCIALLY FIT FOR IT TO RESIST THE EVENTUALITIES OF MARKET SHOW DOWNS
3. DEBT REDUCTION PLAN PRESENTED AT THE AGM
4. THE AIM IS TO MAKE RIL A ZERO NET DEBT COMPANY BY MARCH 2021

• DE LEVERAGING STRATEGY

1. TO REDUCE THE DEBT,DILUTING THE OWNERSHIP IN THE BUSINESS IN FAVOUR OF FOREIGN PLAYERS
2. SELLING 20% STAKE IN ITS OIL AND PETROCHEMICALS BUSINESS TO SAUDI ARAMCO FOR 1.1 LACS CRORE
3. ALSO SELLING 49% STAKE IN ITS FUEL RETAILING BUSINESS TO BP FOR RS 7,000 CRORE
4.  WITH THESE TWO DEALS RIL’S DEBT IS EXPECTED TO COME DOWN TO 37,000 CRORE
5. REASONS
6. DUE TO LARGELY WEAK ECONOMIC CONDITIONS AND SLOWING DOMESTIC DEMAND
7. REFINING MARGINS HAVE BEEN SHRINKING FOR THE LAST SEVEN QUARTERS
8. THE TELECOMS BUSINESS MAY HAVE MADE A PROFIT OF 2,964 CRORE IN THE LAST FINANCIAL YEAR BUT EARNING ARE NOT SUFFICIENT TO REPAY DEBTS AND EARN RETURN ON EQUITY INVESTMENTS AT LEAST IN NEXT 10 YEARS
9. CUT THROAT DISCOUNT IN THE RETAIL BUSINESS IS MAJOR BLOCKAGE FOR INCREASING ITS MARGIN
10. THE TURNAROUND OF BUSINESS LIKE HYDROCARBON E & P AND MEDIA ARE NOT YET CLEAR

• PROBLEM POINTS

1. THE BIGGEST REASON BEHIND RIL’S STRUGGLE IS ITS SHRINKING REFINING MARGINS DUE TO VOLATILE CRUDE PRICES AND DEMAND FLUCTUATIONS CAUSED BY TRADE WARS AND ECONOMIC SLOWDOWN.,
2. FALLING  GROSS REFINING MARGINS RESULTED IN 21% FALL IN THE SEGMENT PBIT IN THE LAST FINANCIAL YEAR
3. GLOBAL PETROLEUM AND PETROCHEMICAL GIANT LIKE EXXONMOBIL,ROYAL DUTCH SHELL AND TOTAL ARE ALSO FACING THE PROBLEM
4. COMPANIES LIKE CHEVRON HAVE INCREASE OUTPUT TO COUNTER REDUCING MARGINS
5. PETRO BUSINESS HAS ALSO BEEN AFFECTED BY SUBDUED DEMAND
6. THE E AND P BUSINESS ALSO MAKING LOSSES FOR THE FINANCIAL YEARS
7. BOTH THE PARTNERS WILL INVEST 35,000 CRORE TO BRING TO PRODUCTION THREE SETS OF NATURAL GAS FIELDS IN THE KRISHNA GODAVARI
8. MASSIVE INVESTMENT HAVE INCREASED RIL’S TOTAL FIANCE COST:- INTEREST PAYMENTS
9. SINCE LAST FINANCIAL YEAR FINANCE COSTS DOUBLED TO 16.495 CRORE COMPARED TO THE PREVIOUS YEAR
10. MORE INTEREST PAYMENTS ARE TO BE GOING HIGHER IN THE FORTHCOMING YEARS AND CAN AFFECT THE COMPANY’S PROFITABILITY IN TURBULENT ECONOMIC CONDITIONS

• STEPS
• THE FIRST STEP TO REDUCE THE DEBT WAS TAKEN BY RIL EARLY THIS YEAR WHEN IT FORMED TWO INFRASTRUCTURE INVESTMENT TRUSTS:

1. DIGITAL FIBRE INFRASTRUCTURE TRUST
2. TOWER INFRASTRUCTURE

·         TRANSFERRED RELIANCE JIO INFRATEL AND TOWER BUSINESS INTO THESE TRUSTS ALONG WITH GROSS DEBTS OF 1.07 LACS CRORE. AN AFFILIATE OF BOOKFIELD ASSET MANAGEMENT INVESTED 25,215 CRORE IN TOWER INFRASTRUCTURE TRUST WHICH HAS 51% PERCENT STAKE IN RELIANCE JIO INFRATEL

·         THE SECOND DEAL TO SELL 20% STAKE IN RIL ‘S OIL PETROCHEMICAL BUSINESS TO SAUDI ARAMCO

·         THE DEAL WITH ARAMCO WILL REDUCE RIL’S CONTROLLING STAKE IN THE BUSINESS TO 40% FROM 51%

• NET RESULT

1.     AFTER THE ARAMCO AND BP DEALS RIL’S NET DEBT IS EXPECTED TO COME DOWN 37,000 CRORE.

2.     FURTHER ANNOUNCED THAT RIL HAS RECEIVED STRONG INTEREST FROM STRATEGIC AND FINANCIAL INVESTORS FOR ITS CONSUMERS BUSINESS JIO AND RELIANCE RETAIL.

3.     INDUCTION OF GLOBAL PARTNERS IN THE BUSINESS

4.     ANOTHER ROUND OF DILUTION OF OWNERSHIP

5.     RIL DE EMPHASIZING ITS BUSINESS IN SHALE GAS IN AMERICA AND FOCUSING IN INDIA

6.     ALSO LOOKING FOR BUYERS FOR RIL’S REAL ESTATE ASSETS AND FINANCIAL INVESTMENTS

• OPINION OF EXPERTS

1. ACCORDING TO EXPERT AMBANI HAS AN UNCANNY SENSE ABOUT THE FUTURE OF BUSINESS
2. INVESTMENT MADE TO BUILD A DIGITAL ECOSYSTEM WAS ONE  OF THE RIGHT STEP
3. PATIENCE WAITING FOR RIGHT BUSINESS ENVIRONMENT BEFORE SCALING RELIANCE RETAIL