Reliance Group debt reduction plan hinges on assets sale

Sale of these assets will help Anil Ambani-led Reliance Group to reduce its Rs 1.14 lakh cr debt

Last week, telecom operator Reliance Communications informed investors it would soon sign a binding agreement with Aircel, leading to a three-way merger of itself, Sistema Shyam and Aircel.

The deal has been in the making since RCom and Aircel entered into talks in December 2015. Once the merger is done, the company will focus on divesting its tower assets, which could fetch about Rs 20,000 crore.

The company is also in talks with international funds to sell its tower assets. The sale of these will help the Anil Ambani-led Reliance Group to reduce its debt from the current Rs 1.14 lakh crore (excluding its non-banking financial services business, Reliance Capital).

RCom had Rs 43,596 crore of gross debt at the end of March, with a debt to equity ratio of about 1.4. At the end of 2014-15, it had gross debt of Rs 42,651 crore and a debt-equity ratio of 1.3. Net profit fell to Rs 681 crore at the end of FY16 from Rs 714 crore a year before.

“Asset monetisation steps will enable RCom to reduce debt by up to 75 per cent,” said Lalit Jalan, the group's director (strategy and corporate affairs).

Sale of the tower business is a long-drawn story. The group had stated its intention to sell these at least thrice. The plan for an Initial Public Offer of equity in Reliance Infratel had to be shelved because of weak market conditions in 2008. In 2012, Ambani said at the RCom annual general meeting of shareholders that he expected to close the tower deal by 2013; it didn't happen.

As the debt mounted and the asset sale did not materialise, the stock took a beating, underperforming all the benchmark indices over years. The company had a market capitalisation of Rs 12,021 crore on Tuesday, down 45 per cent and 23 per cent, respectively over the past six and 12 months.

The group is divesting from a few other businesses, too. It has indicated it will not focus on highly capital-intensive projects with back-loaded returns, such as roads and cement. Reliance Infrastructure has already signed a binding agreement with Birla Corp for sale of its 5.6 million tonnes a year cement plant for Rs 4,800 crore, early this year. The deal is soon expected to close. Further, it plans to monetise its 11 road projects worth Rs 9,000 crore in the current financial year. It has also signed an agreement with PSP Investments (Canada) for 49 per cent sale of its Mumbai power distribution business.

R-Infra had debt of Rs 25,470 crore at the end of 2015-16 and a debt-equity ratio of 0.92. The market has already started rewarding the company’s asset monetisation plan. Its market cap has gone up to Rs 13,735 crore, up32 per cent in the past year. “The monetisation of just three businesses will make R-Infra debt-free on a standalone basis by the end of the current financial year,” said Jalan.

Another group company, Reliance Power, has completed Rs 50,000 crore in capital expenditure to set up 6,000 Mw power generation capacity, including the recently commissioned Sasan ultra-mega power plant. In FY16, its debt increased to Rs 32,056 crore from Rs 30,781 crore a year before; the debt-equity ratio was 1.5. As the company has completed its capex and cash flow from Sasan has started, its market cap has seen a rise. It was Rs 14,011 crore on Tuesday, up about 11 per cent from a year earlier.

Reliance Capital is the brightest spot for the group. It is among the top three in the mutual fund sector. In insurance, it is among the top five private sector entities in both the life and non-life businesses. A little over 90 per cent of R-Cap’s Rs 22,812 crore debt is for forward lending in its non-bank finance business. This has been the best performer in the group, with its market cap up by about six per cent in the past one year to Rs 9,756 crore on Wednesday.

The group plans to stay focused on financial services, telecom, power and defence. In power, renewable energy seems to have caught Ambani’s attention. R-Power plans to develop a 6,000 Mw solar energy park in Rajasthan.

In defence, the group acquired the erstwhile Pipavav Defence and renamed it Reliance Defence and Engineering. Reliance Defence made a loss of Rs 592 crore in FY16 and saw its debt rise to Rs 7,862 crore, up 17 per cent from the previous year.