What is behind RIL plans to become a zero-net debt company?

The Reliance Industries group, currently lead by Mukesh Ambani is one of the largest companies in India. This gargantuan conglomerate, which has wide-ranging interests in the hydrocarbon sector to the telecommunications space and the retail market, is looking to reduce its debt.

The debt of Reliance Industries

• While Reliance Industries has been a very cash conscious company and its external debt floated only between INR 10,000 to INR 50,000 crore between 2001 to 2014 (a rather insignificant amount for a company as large as Reliance), it started taking on massive amount of debt in the previous five years, mainly to fund the expansion and establishment of Reliance Jio.
• While the total size of the Reliance Group is nearly INR 6.23 trillion, it has invested a massive INR 5.4 trillion to fund its expansion in the previous five years. Needless to say, most of this money has come in the form of external debt.
• The total liabilities, i.e. debt is taken by Reliance was a massive INR 3.63 trillion. Out of this, the Reliance’s estimated investment on Jio was a staggering INR 2.1 trillion.

Need to reduce the debt

• Not only was the debt looking bad on the books of the company, but it has also been forced to pay a massive amount of interest to service these loans.
• Various analysts also pointed out flaws with the companies accounting as several costs associated with Jio were either understated or stated in separate heads.
• This, coupled with the losses being taken in the Jio and lack of substantial returns from other investments in retail & FMCG, spooked investors and hence, compelled by concerns voiced by the investors, Reliance is being forced to reduce its debt.
• Hence, Reliance has decided to become a zero-debt company to allay concerned investors, lenders and the various rating agencies about its financial health.

Becoming Zero net-debt

• Reliance has already announced the sale of 20% stake in its refining and petrochemical business to Saudi Aramco of Saudi Arabia. This deal is set to fetch over USD 15 billion to Reliance.
• It is also exploring the sales of 49% stake in Reliance’s fuel network to British Petroleum for another INR 7,000 crores.

Reliance which in the past has relied on “high debt, high cash” strategy may retain few of its existing debt and cover that with adequate cash levels to fund this.