Rights issue credit positive for Reliance Industries; to result in debt reduction: Moody’s

New Delhi: Moody’s Investors Service on Monday said Reliance Industries’ Rs 53,100 crore rights issue is credit positive as earnings will decline because of economic shutdowns.

Last week, Reliance announced it will raise Rs 53,100 crore through a rights equity offering.

Also, the company announced an investment of Rs 5,656 crore by Silver Late in Jio Platforms, the digital services business of RIL.

“This is in line with the company’s target to reduce its net debt to zero by 31 March, 2021. The proceeds from the rights issue will reduce RIL’s net debt by about $7.8 billion and is credit positive,” Moody’s said in a note.

Along with the previously announced asset sales to Facebook, Inc and BP Plc, RIL expects to generate net proceeds of Rs 1.1 lakh crore, which will reduce its net debt by the same amount.

“The total net debt reduction from completion of these transactions will lower RIL’s reported net debt, which was Rs 1.6 lakh crore ($21.4 billion) as on 31 March, 2020, by about 68 percent and will be equivalent to 1.1x its reported EBITDA of Rs 1 lakh crore for the fiscal year ended 31 March, 2020,” it said.

In addition, RIL also announced that it has started the process to carve out its oil-to-chemical (O2C) business as a separate subsidiary in order to facilitate the previously announced 20 percent stake sale in that business to Saudi Arabian Oil Company (Saudi Aramco).

Despite the coronavirus outbreak and lower oil prices, RIL confirmed that the due diligence process for the transaction is ongoing.

“This increases the likelihood of the transaction going ahead as announced in August 2019,” the rating agency said, adding the transaction with Saudi Aramco values the O2C business at $75 billion and can potentially result in $12-15 billion of cash proceeds for RIL, depending on the amount of debt at the O2C business after the reorganization.

Reliance last week approved the biggest-ever rights issue of Rs 53,100 crore at Rs 1,257 per share.

The company had reported a 10.5 percent increase in its reported EBITDA for the fiscal year ended 31 March, 2020, as compared to a year ago.

While the economic shutdowns due to coronavirus outbreak resulted in a decline in earnings from RIL’s O2C and retail businesses for the quarter ended March 2020, its earnings from its digital services continued to grow.

“We expect the earnings from its O2C and retail business to see a steeper decline in the quarter ending June 2020 as India’s economy is scheduled to be under shutdown for at least 45 days in this quarter. An earnings recovery for these segments will depend on the timing of resumption of economic activity, which remains uncertain at this stage,” it said.

Assuming the economic activity to resume by middle to end of May 2020, the rating agency expected RIL’s consolidated EBITDA to decline 10-12 percent in FY2021 as compared to FY2020. However, the EBITDA is expected to return to FY2020 levels in FY2022 as improved demand in combination with low oil prices will result in higher earnings for the O2C segment, while the earnings growth for retail will resume.

“RIL’s recent foray into online retail through its partnership with Whatsapp and Facebook could result in a further boost in its retail earnings, which is currently not factored in our projections,” Moody’s said.

(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Firstpost)

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