Why RIL could actually become zero debt by December 2020

In August 2019 when Mukesh Ambani had first announced plans to become a zero-net debt company by 2021, most analysts thought it was impossible. After all, Reliance had taken a mountain of debt to finance its telecom and digital foray. There appeared to be no way for RIL to monetize assets in such a short time and become debt free. But a lot has progressed since then.

Reliance’s debt dilemma

Not many may be aware, but Reliance was a zero-net debt company till 2012. We are referring to net debt and not to gross debt. As of March 2020, RIL has gross debt of Rs.3.30 trillion and cash reserves of Rs.1.70 trillion leaving the company with a net debt of Rs.1.60 trillion. This is the figure that RIL is looking to address by March 2021. But, how did this massive debt mountain come about if RIL was zero-net debt as late as 2012? There have been two factors  that drove this debt binge. The first trigger, of course, was the Reliance Jio foray. The company used a mix of refining/petchem profits and long term  borrowings in the market. Secondly, RIL also invested heavily in upgrading its refining and petchem  capacities. In all, RIL had invested Rs.550,000 crore since 2014 and this was substantially funded by debt. However, now RIL does realize that to sustain valuations in the future, it needs to focus on a more flexible balance sheet. Otherwise, the financial risk may become too much for RIL.

How monetization was done

Reliance took two important steps in 2019 towards monetization of its assets to repay debts. Firstly, RIL agreed to sell 50% stake in its fuel marketing business to BP for Rs.7000 crore. Then it also struck a deal with Brookfield of Canada to sell its towers business for Rs.25,000 crore. But the biggest deal of all was the Rs.110,000 crore deal to sell 20% stake in its refining and chemicals business to Saudi Aramco. However, all the above deals are still to get through fully. While weak oil prices have played spoilsport, the COVID-19 and the global lockdown have also been reasons. Now, RIL has a Plan-B also in place.

Rights issue and Facebook deal

The move towards monetization gained additional momentum in April 2020. Firstly, RIL announced the sale of 9.99% stake in Jio Platform to Facebook for Rs.43,500 crore. This was topped up by another Rs.53,120 crore rights issue. Both these are done and dusted and there is not much uncertainty about them. Also, they will generate enough for RIL to substantially wind down its net debt. If the Aramco deal also goes through, even partially, then RIL should be on target to become zero-net debt by March 2021. In fact, RIL’s CFO has expressed confidence of becoming zero-net debt by December 2020 itself. That may sound tough given the market but it is not exactly impossible!