Reliance Surges Most Since 2017 on Ambani Plan to Slash Debt

https://www.bloomberg.com/news/articles/2019-08-12/aramco-bp-to-help-ambani-slash-22-billion-of-reliance-s-debt

Reliance Industries Ltd. soared the most in more than two years after billionaire
Mukesh Ambani
revealed a plan to sell a stake to Aramco as part of efforts to pare debt.

The conglomerate aims to be a zero-net-debt company in 18 months, Asia’s richest man told shareholders Monday. Aiding that would be a proposed
sale of 20%
of Reliance’s oil-to-chemicals business to

Saudi Arabian Oil Co. at an enterprise value of $75 billion. The company will also start preparing to list its retail and telecommunications units within five years, Ambani said.

The stock jumped as much as 12% in Mumbai on Tuesday before closing with a 9.7% gain, the biggest since February 2017, while the gauge S&P BSE Sensex declined. Trading volume was also the highest in more than two years. Morgan Stanley, Macquarie Group and BOB Capital Markets were among brokerages that
upgraded
the stock.


Aramco Buys Into Reliance Refining Business as Earnings Drop

Reliance to Sell Stake to Saudis at $75 Billion Value

The tycoon is cleaning up the group’s finances following years of spending on his wireless carrier, whose entry in 2016 with free calls and cheap data upended the industry and spurred a consolidation. The $50 billion plowed into the phone venture, mostly in debt, has raised concerns among analysts including at Credit Suisse Group AG that Reliance’s ballooning

borrowings could weigh on growth. Ambani sought to allay those fears.

“With these initiatives, I have no doubt that your company will have one of the strongest balance sheets in the world,” he said. “We will also evaluate value unlocking options for our real estate and financial investments.” The group spent $76 billion in the last five years, he said.

Mounting Burden

Reliance’s total debt more than doubled while finance costs grew ten fold in five years

Source: Reliance Earnings Statements

The Aramco deal should be completed by March and is subject to due diligence, definitive agreements and regulatory and other approvals, Ambani said. He didn’t say how the deal would be structured.

Saudi Aramco and Reliance Industries have agreed to a non-binding Letter of Intent regarding a proposed investment in the Indian company’s oil-to-chemicals division comprising the refining, petrochemicals and fuels marketing businesses, according to a statement from Reliance on Monday.

Signaling an end to the spending cycle at
Reliance Jio Infocomm Ltd.
, Ambani is setting a new growth path for his group, whose bread-and-butter business has been oil refining and petrochemicals. The company is building an e-commerce platform by leveraging its phone network and Reliance Retail Ltd. to eventually take on Amazon.com Inc. and Walmart Inc.

“This is a unique business model we are building in partnership with millions of small merchants” and mom-and-pop stores, he said. As part of the plan, Reliance has been forming partnerships and acquiring technology assets. This month, Reliance
announced plans
for a joint venture with Tiffany & Co. to open stores for the jeweler in India, and in May paid $82 million for the British toy-store chain
Hamleys
.


The Tiny Deals Behind Mukesh Ambani’s Bid to Take on Amazon

The new businesses are likely to contribute 50% of Reliance’s earnings in a few years, from about 32%, Ambani said.

What Bloomberg Intelligence Says

“Reliance Industries could dominate the Indian telecom and organized-retail segments through aggressive expansion, capitalizing on its energy business. More than $7 billion in annual cash flow from the energy business provides a war chest to win market share in the retail and telecom industries”

–Kunal Agrawal, energy analyst said in an Aug. 12
note

While the spending on Jio has helped Reliance lure almost 350 million users in the world’s second-biggest mobile market, the growth has come at a price.

Not Since 2013

Reliance had a net debt of 1.54 trillion rupees ($22 billion) at the end of March 31, according to Ambani. His plan to carry zero debt would mean the borrowings would fall below the company’s cash reserves to a level not seen since 2013.

Last week, Credit Suisse cut its recommendation for Reliance’s stock and the price target citing reasons including rising liabilities and finance costs. Shares

surged on Tuesday to pare their losses to just a little under 10% from the record reached on May 3. The benchmark S&P BSE Sensex declined 5.2% in the same period.

Reliance’s debt is backed by “extremely valuable assets,” Ambani said, signaling his group isn’t prone to the kind of troubles that have been plaguing many other corporate borrowers in India. The conglomerate controlled by Ambani’s younger brother, Anil, has been
struggling
to pay creditors while his mobile carrier has slipped into bankruptcy.

Deal Spree

Apart from the Aramco deal, Reliance also
announced
a joint venture with BP Plc this month, under which the European oil major would buy 49% of the Indian firm’s petroleum retailing business. Reliance would receive about 70 billion rupees under this deal.

The “commitments” from the Aramco and BP deals alone are about 1.1 trillion rupees, Ambani said, adding that Reliance will induct “leading global partners” in telecom and retail units in the next few quarters.

Some of the planned offerings revealed by Ambani:

  • A new broadband service called Jiofiber will start commercial services from Sept. 5 and will be available at tariff packs starting as low as 700 rupees a month with a minimum speed of 100 Mbps
  • Jio will install across India one of the world’s largest blockchain networks in the next one year
  • After mobile broadband, Jio to start generating revenues from Internet of Things and broadband for home, businesses and smaller enterprises by March 2020
  • Reliance is getting ready to roll out the new commerce platform at a larger scale to capture what Ambani sees as a $700 billion business opportunity
  • Reliance Retail aims to be among the world’s top 20 retailers in the next five years

— With assistance by Ari Altstedter

(Updates with closing share prices in third paragraph.)

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