Brokerage firms divided on impact of RIL's liability transfer to InvIT

Earlier this month, conglomerate Reliance Industries (RIL) announced transfer of its telecom tower and optic fibre assets to separate investment trusts, with some of its liabilities. 

Brokerage firms seem divided and uncertain on the impact of this on the company.

In addition to the trust model, these firms largely lack consensus on future capital expenditure, maritime guidelines’ impact and how one accounts for the trust-related debt. “The InviT (infrastructure investment trust) has effectively allowed RIL to replace Rs 71,000 crore of external debt with 20-year money, thereby removing any refinancing need on this amount of debt,” analysts with JP Morgan wrote in an April 22 note, on the move to transfer its fibre and tower assets to two such trusts.

V Srikanth, joint chief financial officer for RIL, said at an earnings announcement meet that the InvIT transfer had helped reduce net debt to Rs 1.54 trillion for the March 2019 quarter, down 21 per cent from the December quarter. 

RIL said this meant it had deleveraged but brokerage firms are divided. JP Morgan, for instance, said: “In our view, there is no economic deleveraging.” On the other hand, CLSA said it was “deleveraging in action”; others said it was “value accretive”. Some others said they awaited more clarity from the June quarter results, on the InvIT’s financial impact. 

The lack of consensus is also true for expectation on RIL’s capital expenditure (capex) plans. Some expect such spending to have peaked and others think it would continue for some time. “Commentary suggests capex intensity may have peaked,” said analysts with CLSA on April 22. Elara Capital, however, said on April 21: “Capex will remain significant, given wire-line broadband roll-out.”

A possible reason is the lack of forecasts (‘guidance’) from RIL’s management on both counts. “Capex has been difficult to forecast without any management guidance. We have assumed capex intensity will decline, going forward,” said analysts with CGS-CIMB on April 19. RIL has stopped sharing capital expenditure forecasts for both RIL and its telecom business. For the March quarter, RIL’s capex was Rs 32,700 crore, largely driven by the telecom business.

Analysts say RIL also did not share the InvIT’s impact on earnings before interest, taxation, depreciation and amortisation (Ebitda). “Management eluded from stating an Ebitda impact as the demerger happened a few days back and the InvIT structure is still fluid; the same will depend on the potential investor,” wrote analysts with Emkay on April 20.

How analysts now account for capex might also differ. “RIL has explained the additional capex will be undertaken by the SPV (Special Production Vehicle), thereby keeping Jio/RILs balance sheet lean,” said analysts with CLSA.

The Street is also divided on how one has accounted for the new InvIT structure in RIL’s consolidated numbers. “We compute effective net debt, including capex creditors, deferred spectrum liabilities and fiber/tower liabilities. We have included liabilities related to fibre and tower entities, as RIL controls 100 per cent stake currently, 51 per cent through trusts and 49 percent through Jio,” wrote Kotak on April 21. They peg the effective consolidated net debt Rs 3.3 trillion, as of end-March.

There is not much clarity in the offing for RIL’s refining segment as well. The new Indian maritime guidelines that take effect in 2020 were earlier expected to improve RIL’s margins. While some brokerages have raised a red flag, others continue to be confident.
 

“With IMO pollution norms for fuel oil to kick-in from January 2020, we estimate a $4/barrel gross refining margin boost for three to four years and add this to our valuation at thrice the EV (enterprise value) to Ebitda,” analysts with CLSA said.

JP Morgan warns against higher than warranted optimism. “In our view, the stock and consensus earnings estimates are currently NOT pricing in material disappointment in IMO 2020. And, hence, to that extent over the next two quarters, if IMO 2020 does not drive the refining margin weakness, we could see large consensus earnings cuts,” their analysts said.

What they said

On liability transfer to InvIT

JP Morgan: No economic deleveraging

CLSA: Deleveraging in Action 

On capex

CLSA: Capex intensity may have peaked

Elara Capital-Capital expenditure will be significant 

Source: Analyst reports