Aramco deal, more asset sale crucial for making RIL net-debt free: Analysts

Mukesh Ambani’s plan to make Reliance Industries (RIL) net-debt free before March 2021 will hinge on completion of announced deals and some more initiatives, according to analysts.

 
For the quarter ended December 2019, RIL turned free cash flow (FCF) positive, a reversal that most brokerage firms welcomed. 
However, analysts added that the company will need stronger FCF and more deals to meet debt reduction targets.

 
“Decline in capex intensity led to positive FCF after five years; debt deleveraging should accelerate in the coming quarters,” analysts at HSBC noted in a post results note on RIL. 

 
The company’s total debt as of December 2019 was at Rs 3.06 trillion against Rs 2.87 trillion as on March 31, 2019. Net debt of the company as of December 2019 was Rs 1.53 trillion. 

 
Company officials noted that the intensity of capital expenditure has been coming down quarter-on-quarter. For the quarter ended December 2019, total capital expenditure was at Rs 14,000 crore. Analysts point out that this is the lowest quarterly capex in many years.

 
Not everyone is convinced that the positive FCF will help the company achieve its zero net debt target. 

 
In August 2019, group chairman and managing director Mukesh Ambani told shareholders that the company will be a zero net debt company before March 2021.

 
“Even stronger organic FCF, unlikely in our view, would be needed to drive the $25 billion cut in net liabilities that Reliance guides to by March 21, even if the $15 billion Aramco transaction closes by then. We think more stake sales are thus necessary,” analysts with Jefferies wrote in a post results note on the company.

 
Part of the debt-reduction plan, in August RIL said, it also plans to find global partners for its retail and telecom businesses and unlock value in real estate and financial investments.

 
Analysts with JP Morgan point out that the large debt reduction would require higher telecom tariffs and recovery in RIL’s core business. 

 
“Large debt reduction would require the completion of the Saudi Aramco investment, large tariff hikes in Jio, recovery in both petchem and refining, and reducing capex even further from here,” they wrote in their January 19 report on RIL.
RIL’s management has refused to share a timeline for a definitive agreement on the Saudi Aramco deal.

 
The company looks to sell 20 per cent stake in its oil to chemicals (O2C) division to Saudi Aramco for around $15 billion. 
Analysts with Kotak Securities added, along with completion of this deal, sustained increase in FCF is crucial for debt reduction. 

 
“The culmination of 20 per cent divestment in O2C business to Saudi Aramco, monetisation of fibre Infrastructure Investment Trust (InvIT) in the near term and sustained increase in organic FCF trajectory are crucial for targeted deleveraging of the balance sheet,” the analysts wrote in their note on RIL. 

 
Top officials at the press conference on Friday and later at the analysts’ meet said that the deal will not have any adverse impact on the company’s planned debt reduction.



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