Mukesh Puts Own Cash To Pare Down RIL Debt; His Playbook Is Different From Dad Dhirubhai’s

By announcing a massive rights issue of fresh equity worth Rs 53,125 crore priced at Rs 1,257 a share, Mukesh Ambani has signalled that he is willing to put his money where his mouth is. As 50 per cent owner of Reliance Industries Limited (RIL), Ambani will have to put in Rs 26,500-and-odd crore into his business, and more if other shareholders don’t take up their rights shares.

There has simply been almost nothing like this in Indian private business before, where a promoter has put in this kind of money into his own company in order to let it pay down its debt. In fact, this is the first time in nearly 30 years that an Ambani is investing his own personal fortune to buy shares in his own company at huge valuations.

If anyone is wondering where the money will come from, here is the probable answer: the value of Ambani’s 50 per cent shareholding in RIL is more than Rs 465,000 crore at current RIL share prices. The money for the rights issue can – at a crunch – be raised either by selling shares, or by borrowing against them. Or by dipping into other sources of personal wealth that we don’t know much about.

In the past, when Dhuribhai Ambani was alive, the promoters subscribed to convertible debentures, which were then converted to shares at huge premia to achieve two basic aims: one was to fund expansion with non-bank debt initially; the second was to whittle down the debt by converting the bonds to shares at high premia. This enabled RIL to both lower its debt costs, and allow the market to pay it off.

This time, son Mukesh Ambani is doing it differently. He has raised debt from banks and financial institutions, and is paying it back with capital raised directly through fresh equity.

Announcing the company’s results yesterday (30 April), Mukesh Ambani said that he will be raising capital of Rs 104,000 crore in the next two months (ie, by June end). This money includes the rights issue proceeds, the Rs 43,574 crore coming from selling a 9.9 per cent stake in Jio Platforms to Facebook, and some previously committed investments by BP.

As at the end of March 2020, RIL has gross debt of Rs 336,294 crore. Excluding cash and cash equivalents of Rs 175,256 crore, RIL had a net debt of Rs 161,035 crore.

The rights issue and Facebook investments, if they come on time, will dramatically bring down RIL’s debt profile, and the goal is to become a net zero-debt company by March 2021. Mukesh Ambani has promised to bring the net debt down to zero even earlier, possibly by December 2020.

The rights issue, which will be subscribed to in instalments by issuing partly paid shares first, will enable retail and institutional investors to pace their contributions over a longer timeframe.

Another plan, which involves divesting a minority stake in RIL’s oil-to-chemicals (O2C) business to Saudi Aramco, will enable the debt target to be achieved quickly as long as the scheme gets the regulatory go-ahead. RIL confirmed that the Aramco deal was on track, and in preparation for it, the board has sanctioned the hiving off of the O2C business into a separate company.

The reduction of debt and the hiving off of the O2C business will transform RIL in many ways.

One, it will move away from bulk commodities and a business-to-business orientation to retail orientation, with Reliance Jio and Reliance Retail being the main drivers of growth in future. Both businesses are profitable, and look set for major debuts on the stock markets in due course.

Two, the flagship company will look more like a holding company in due course, especially after the O2C hiveoff, and Ambani will in essence be focusing on capital allocation between his various businesses at RIL.

According to RIL, the O2C business comprises “refining, petrochemicals, fuel retail and aviation fuel (majority interest only) and bulk wholesale marketing businesses together with its assets and liabilities.”

Three, the expansion and listing of the two consumer facing businesses, Jio and Retail, will enable Mukesh Ambani to plan for succession among his two sons, Anant and Akash. Daughter Isha, who married businessman Ajay Piramal’s son Anand in 2018, has already played a major role in launching the group’s e-commerce portal Ajio.com. The actual inheritance plans will become clearer once the separate companies are listed.

Dhirubhai built his vertically integrated O2C company by floating separate companies and merging them with the flagship RIL.

Son Mukesh is doing the opposite: delivering value by demerging businesses and effectively making RIL a holding company with different assets to manage.