 "Reliance Industries prefers using debt to cash for capex")
This would normally mean depletion of cash and cash equivalents on a company’s balance sheet, as part of treasury management. But, that is not the story with RIL. The Mukesh Ambani company saw its cash and cash equivalent increasing to Rs 84,844 crore, from Rs 83,822 crore the previous year.
This resulted in gross debt increasing to Rs 1.81 lakh crore at the end of March, from Rs 1.68 lakh crore a year before, as the company borrowed for meeting its capital expenditure plans. These numbers tell the strategy for cash deployment.
“The company prefers a model of borrowing, instead of using its own cash and cash equivalent, as its borrowing cost is less than its treasury yield,” says G Chokkalingam, managing director at Mumbai-based Equinomics Research and Advisory. RIL saw its treasury yield coming down to 8.3 per cent in 2015-16, from 9.4 per cent in the year-before period at a time when interest rates in the country moved down. The yield was calculated on interest income, profit on sale of investments and dividend income, at an average investment and cash & bank balance for the two preceding financial years. The numbers are for the consolidated accounts of the company. The Reserve Bank of India cut its benchmark repo rate (at which banks borrow from it) in the financial year by 75 basis points, to 6.75 per cent. Interest cost for the company for the year came down to 2.07 per cent, from 2.16 per cent for the previous year. This makes its borrowing cost cheaper than its treasury yield. Global credit rating agency S&P retained a BBB+ rating for RIL in May, signifying adequate protection parameters for lenders. This has helped the company keep its borrowing cost low.
In 2012, he was promoted to joint CFO; his responsibilities included managing the company’s voluminous fund-raising plan and generating the highest yield possible from treasury operations. RIL reported other income of Rs 7,582 crore for FY16, primarily from treasury operations. The company saw its cash and bank balance coming down by 10 per cent, to Rs 11,197 crore. Its current investment came down by 22 per cent, to Rs 39,928 crore. This happened as the company shifted its cash and investments to non-current or long-term investments, which saw a 66 per cent increase to Rs 33,719 crore. These investments include instruments such as bonds, debentures and fixed maturity plans of mutual funds. The shift to long-term products is expected to protect return at a time when interest rates are falling.
“The success of RIL’s treasury lies in managing its portfolio by actively buying and selling securities to capture market moves and book gains on these sales, before shifting to securities in other tenures,” said a person familiar with the operations, on the condition of anonymity.
While Srikanth’s team can give entities that have treasury operations at their core (such as banks) a run for their money, investors aren’t pleased with RIL sitting on a huge amount of cash, bank balances and investments. For, this reduced the company’s return on capital (RoC) to 9.9 per cent in 2015-16, from 12.31 per cent and 18.83 per cent, respectively, five and ten years ago. RoC is the key element to determine a company’s ability to deliver better returns on its capital, through its businesses. RIL’s inability to deploy the cash for better returns has cost it the coveted position of the most-valued company in the country.