The Covid-19 pandemic has taken the global economies and their growth projections hostage. The level of gloom that the Black Swan event has brought over is summed up as “unparalleled global recession underway”, in its latest report by global rating agency Fitch Ratings. “The world GDP (gross domestic product) is now expected to fall 3.9% in 2020, a recession of unprecedented depth in the post-war period,” said Brian Coulton, Fitch Ratings’ London–based chief economist. In terms of magnitude, this is twice the decline anticipated in Coulton’s early April global economic outlook, and would be twice as severe as the 2008-09 recession.
In the midst of all the gloom and doom, there are reasons to cheer for one set of stakeholders— investors in Reliance Industries (RIL). Mukesh Ambani-led RIL on Wednesday (April 22) announced that U.S.-based social media giant Facebook Inc. had signed a binding agreement to invest $5.7 billion (₹43,574 crore) in Jio Platforms, for a 9.99% stake in the subsidiary of RIL, which is labelled as the next-generation technology company whose wholly-owned subsidiary, Reliance Jio Infocomm, provides a connectivity platform to over 388 million subscribers.
According to its FY19 annual report, RIL’s total investments in Reliance Jio Infocomm (R-Jio) on March 31, 2019, stood at ₹44,200 crore, which constituted 13% of the total investment portfolio of RIL as of FY19. Separately, R-Jio had demerged its passive tower and fibre infrastructure into an InvIT (Infrastructure Investment Trust) structure.
On August 12, 2019, at RIL’s 42nd annual general meeting, chairman Mukesh Ambani had spelt out that RIL had put in place a clear roadmap to become a zero net debt company within the next 18 months —by March 31, 2021. On the same day, Ambani had announced two separate investment deals worth ₹1.1 lakh crore with Saudi Aramco and BP.
And, on the consumer businesses, Jio and Reliance Retail, Ambani had spoken of having received strong interest from strategic and financial investors. “We will induct leading global partners in these businesses in the next few quarters, and move towards the listing of both these companies within the next five years,” Ambani had told shareholders.
The Saudi Aramco deal to invest in RIL, for a 20% stake in RIL’s oil to chemical (O2C) division at an enterprise value of $75 billion, could be on the backburner owing to the Covid-19 propelled gloom and the glut in oil prices. However, the tower assets’ sale proposed to Canada’s alternative assets management firm Brookfield has got a green signal for deal size worth $3.7 billion, or ₹25,215 crore.
Clearly, RIL is on track at monetising its assets in a challenging period. Going by the deal values, the transactions look everything else except distress sales. Interestingly, on the Facebook deal, Fitch Ratings, which has assigned a rating of BBB-/Stable), is of the view that it will help both companies monetise the digital platforms; and aid in deleveraging of RIL’s balance sheet.
In a release following the deal announcement, Fitch Ratings highlighted that it had last revised the outlook on RIL’s ‘BBB’ Local-Currency IDR (Issuer Default Rating) to ‘Positive’ in August 2019. Fitch Ratings, in the release, highlighted that it may upgrade RIL’s rating to ‘BBB+’ if net adjusted debt/Ebitda ratio improves to below 1.5 times on a sustained basis. Net adjusted debt/Ebitda ratio is a measure of leverage, which conveys how well a company can cover its debt.
In their release, Singapore-based Nitin Soni, Fitch Ratings’ senior director-corporates, and his Mumbai-based colleague Girish Madan, director-corporates, noted that the deal with Facebook is part of RIL’s plan to strengthen its businesses and to achieve a net cash position—through partnerships and supported by organic growth and low-capex.
“We expect the partnership with Facebook to bolster RIL’s consumer business in the medium term,” Soni and Madan noted. “In our view, the proceeds from the transaction should help RIL maintain the pace of its deleveraging—counteracting the likely weakness in its refining and petrochemical segment in FY21).”
On expected lines, Fitch Rating expects RIL’s O2C segment to face volume and margin headwinds due to the impact of the Covid-19 pandemic. Soni and Madan expect the pandemic to weaken demand for refined products and petrochemicals in Asia-Pacific during 2020, with a gradual recovery through 2021 to pre-Covid-19 levels. “However, RIL should be less affected than peers due to the high complexity of its refineries and integrated petrochemical operations with feedstock flexibility,” the duo noted.
Soni and Madan are also of the view that the usage of digital platforms is likely to grow significantly in the medium term, amid severe disruptions caused by lockdowns and social distancing measures. “Increasing reliance on digital platforms might also assist RIL in gaining market share in India’s growing e-commerce segment, and soften the impact of lower footfalls in its physical retail stores,” the duo added.
According to Nomura analysts, Anil Sharma and Aditya Bansal, in the short term, the deal allays investor worries on high debt and deleveraging efforts. The duo, in the research note, highlighted that out of the deal proceeds, around ₹15,000 crore ($2 billion) would go into Jio Platforms, while the rest ₹28,574 crore ($3.7 billion) would go to RIL. And, this will effectively reduce RIL’s net debt by $3.7 billion. Also, the infusion of ₹15,000 crore in Jio would mean that in the near term, there will not be much need for further capital infusion by RIL.
“Reliance’s high debt has been one of the major investor worries in recent years,” Sharma and Bansal flagged. These concerns have increased recently with sharp declines in oil prices and a weak macroeconomic environment as the world grapples with containing Covid-19. In their March 16 note, the Nomura duo had highlighted that while RIL’s de-leveraging plans could get delayed, this should not be a big concern.
“This transaction—the infusion of nearly $5.7-billion by Facebook—should allay investor concerns, in our view,” Sharma and Bansal noted. The duo have retained their ‘buy’ rating on RIL, and also their target price of ₹1,770 a share – an upside of 29.76% above April 22’s prevailing price of ₹1,364.
At Thursday’s high price of ₹1,385.85 a share on the BSE, clearly, RIL’s share prices have come a long way from the 52–week low of ₹875.7 on March 23. The recovery of ₹510 a share, or 58.26%, in less than a month shows that RIL’s share prices could go a long way.
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