Reliance’s Funding Journey From Net Debt Zero To Net Zero Carbon

While Ambani will have to raise fresh debt for Reliance’s new energy venture, that business will attract a new pool of investors.

Laborers sit outside a Reliance Industries construction site at the Bandra Kurla Complex in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Laborers sit outside a Reliance Industries construction site at the Bandra Kurla Complex in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Over seven years, 2014 to 2021, Reliance Industries invested Rs 7,61,600 crore in its old and new economy businesses. It then went on a debt diet and asset monetisation binge – raising enough money last year to achieve net zero debt ahead of target. But that’s a joy shortlived, as the Mukesh Ambani-led farm-to-fuel major embarks on another investment cycle.

Reliance raised Rs 2.13 lakh crore by selling stakes in Jio Platforms and Reliance Retail and part payment of a rights issue in the last financial year. The second and third tranche from the rights issue are expected in fiscal 2021-22.

During the last financial year it net repaid Rs 54,029 crore in non-current borrowings and Rs 29,681 crore in current borrowings on a consolidated basis but a large part of it was debt repayment (including $7.8 billion ECB repayment) belonged to standalone entity and not subsidiaries.

At the end of the year, it had Rs 2.51 lakh crore in consolidated current and non-current borrowings as per its annual report.

This made Reliance a net free cash flow company in FY21. That is, more cash was coming in via sales than was going out via operating or financing expenses.

It ended the year with a return on capital of 9.6% on a standalone basis – on a consolidated basis this would be around 6% given the capital investment in the subsidiaries.

RIL AGM 2021: Mukesh Ambani Speech - Top 5 Takeaways

The Funds Needed To Invest In New Energy

Brokerages estimate that Reliance, on a consolidated basis, will generate Rs 1.70 lakh crore in operating cash flows and Rs 63,000 crore in free cash flows over the next two financial years. But that is already earmarked for capex towards Jio Platforms and Reliance Retail. Also, the cash generated by these individual businesses may not be fungible as they are now independent, board-governed companies with marquee investors. Arm’s-length will have to be maintained.

In FY21, Rs 36,000 crore, close to half the total consolidated capital expenditure of Rs 79,667 crore, was for digital services. The FY22 capex of Rs 88,000 crore is also largely for the digital business. Over the next three years, brokerages estimate a normalised level of capital expenditure to Rs 40,000 -50,000 crore each year. Again, mostly allocated to the digital and retail ventures.

This doesn’t leave much room to scrounge up the Rs 75,000 crore RIL needs over the next three years to back Ambani’s new green energy plans.

Reliance’s Funding Journey From Net Debt Zero To Net Zero Carbon

Of course, there’s the chance that after pending for two years, the oils to chemicals business stake sale to Saudi Aramco may happen this year. If it does it will yield up to $15 billion. But, the O2C business may use that to pare $25 billion debt.

In short, Ambani will have to raise fresh debt to fund the new venture. That could push free cash flow expectations by another few years.
RIL AGM: RIL's Corporate Tax Payment Fell Sharply In FY21

The New Energy Business Will Help Raise Funds

The new energy investments not only seek to exploit a business opportunity, they will also aid the fossil fuel giant in its task to become net zero carbon by 2035. And will help attract a new pool of investors – ESG funds. Ambani would not want the RIL share to take the route cigarette major ITC’s shares have – where foreign funds have exited over ESG issues and the share price languishes despite generating free cash flows.

Because free cash flows may provide dividends, but without global investor interest the stock will not create wealth.

To fund the new business, Reliance is likely to tap global ESG funds. And, while that will return it to a net debt position, the debt-equity level will be comfortable.

Ambani may also consider taking Jio and or Retail public. Even a small dilution of RIL’s stake in the subsidiaries will yield it billions and help fuel the company’s new energy plans.

Sajeet Manghat is Executive Editor at BloombergQuint.

Mukesh Ambani Goes Green: Old Playbook, New Play