Capital expenditure done, Reliance Industries now eyes debt reduction

In June 2011, at Reliance Industries’ (RIL’s) 37th annual general meeting (AGM), Chairman and Managing Director Mukesh Ambani had told shareholders that RIL would be a “debt-free” company.

Ten months later, RIL was virtually debt-free on a net-cash basis at the consolidated level, after considering its cash and bank balances as well as investments. 

With its capital expenditure plan nearly completed, India's most valuable company is once again in a position in which it will start reducing debt. 

“RIL was debt-free some years ago. The larger idea is to go back to that status. So far, it was more about interest payments, from now on debt repayments will also be looked at. Cash flows from the petrochemicals business are good enough to meet debt obligations,” said a person with a knowledge of these plans.

An email query sent to RIL on Friday remained unanswered.

RIL has been planning expansion massively for the past few years, with an investment of Rs 1.5 trillion in various projects in the core petrochemicals and refining segments and an additional Rs 2 trillion in its telecom venture Reliance Jio (Jio). 

With Jio starting commercial operations and the expansion cycle in its core businesses nearing completion, debt repayment is expected to be back in focus. 

In 2008-09, RIL had a net debt-equity ratio of 0.39 with a net debt of Rs 470 billion. By 2012-13, its net debt stood reduced to nearly a quarter and the net debt-equity ratio was just 0.08, the data from Capitaline show.

On January 2, RIL announced commissioning its off-gas cracker project, which also marked the end of its capital expenditure in the petrochemicals business. Analysts with Bank of America Merrill Lynch in a January 9 report said with the expected fall in expenditure, RIL would be free cash flow positive in the next financial year. “RIL has recently commissioned the off-gas cracker project. With the expected start of the petcoke gasifiers (in the next six months), RIL’s core Ebitda should reach $10 billion annualised ($6.9 billion in FY17). Falling capital expenditure means RIL should be free cash flow (FCF) positive in FY19,” the analysts wrote in the Bank of America Merrill Lynch report.

Ebitda is earnings before interest, tax, depreciation, and amortisation. FCF is the surplus profits available to a company after taking into account its capital expenditure to maintain or expand its business.

Jio is also expected to break even in the next financial year, which should help arrest any further investment commitments to sustain this business. “In Jio, we expect an Ebitda of Rs 142 billion in FY19, with a subscriber base of 205 million and average revenue per user of Rs 172 per month. We expect profit after tax break-even in FY19,” analysts with Motilal Oswal wrote in a November report.

For the September quarter, RIL said Ebitda for its digital services segment was at Rs 14.43 billion and net loss at Rs 2.71 billion. This was the first quarter of commercial reporting for Jio.

RIL needs to repay a large amount of debt in the next few years. As of March last year, RIL’s consolidated debt was Rs 2.17 trillion with a net debt-equity ratio at 0.52. According to the data available with Bloomberg, debt worth Rs 62 billion will be up for repayment in the current financial year, Rs 250 billion in 2018-19, and Rs 109 billion in 2019-20.

To put the earnings from the core businesses in perspective, the petrochemicals segment reported earnings before interest and taxation (Ebit) of Rs 49.60 billion and the refining segment reported an Ebit of Rs 66.21 billion in the quarter ended September 2017. RIL reported an Ebitda and net profit of Rs 433 billion and Rs 314 billion, respectively, for 2016-17, at the standalone level. Motilal Oswal analysts expect Ebitda and net profit to rise to Rs 516 billion and Rs 364 billion, respectively, in 2017-18. With the ramp-up of new projects, these numbers could look better in 2018-19. 

“The entire petrochemicals business will show big-time results, with expansions complete,” said a consultant for the oil and gas industry.