Reliance Retail May Have To Restructure Before It Lists

In a recent note by Care Ratings, the credit rating agency said that after completion of large capex in the last three years and with a relatively asset-light business model, RRVL’s capex intensity is expected to moderate, which in turn should ensure sustained comfortable capital structure in the medium-term.

Ambani tapped foreign investors again in 2023 to raise fresh capital for RRVL, its retail holding company. It raised Rs 17,667 crore from investors, including Rs 2,500 crore invested by Reliance Industries Ltd. at a price close to nearly Rs 1,200 apiece. This helped the company reduce its debt-to-equity ratio on a standalone level.

The last equity funding gave the retail venture a valuation of $100 billion, that’s nearly half the current market cap of the parent Reliance Industries. At the end of the fundraise, Reliance Industries’ stake in the retail holding company fell to 83.56%.

The latest fundraise came in November 2020, when RRVL raised Rs 47,265 crore amid the Covid-19 pandemic. So far, it has raised Rs 65,292 crore from investors, a bulk of this has been advanced to its key subsidiary Reliance Retail Ltd.

The fast pace of expansion in the last three years is putting stress on cash flows as working capital requirement and foray into newer consumer areas is consuming cash.

Reliance Retail Ventures closed the year-ending March 2024 with a consolidated profit of Rs 11,101 crore, a jump of 21%. This was on a revenue of Rs 2.73 lakh crore.

RRVL expanded its retail network to 18,836 stores, covering 79.1 million sq. ft. of retail space.

The key retail footprint is housed in Reliance Retail Ltd., which is the country’s largest retailer by reach, scale, and profitability. At the end of March 2024, out of Reliance Retail’s total debt of Rs 81,060 crore, Rs 40,164 crore were advances from its holding company RRVL, this stood at Rs 25,325 crore in the previous year.

While Reliance Retail has been able to lower its debt-equity ratio from 1.9 times led by cash generation, it is still at 1.58 times at the end of March 2024.

RRVL last year acquired Metro Cash and Carry India Pvt. for Rs 2,486 crore and enhanced its foray into consumer products by investing an additional Rs 817 crore.

RRVL is now looking at segregating its warehousing infrastructure into a Trust and could hive it off as a InvIT (infrastructure investment trust) at some point in the future. Last fiscal, it had shifted a bulk of its supply chain and warehouse infrastructure to Intelligent Supply Chain Infrastructure Trust and Reliance Logistics and Warehouse Holdings Ltd., which will result in transfer of assets and costs from its balance sheet in FY25. Both ceased to be its subsidiary.

It transferred mid-sized warehousing assets worth up to Rs 3,000 crore to Reliance Logistics and Warehouse Holdings. This was done for a consideration of Rs 8,000 crore. It had warehouse space of more than 35 million square feet.

The rapid expansion has led to a requirement of higher working capital, leading the company to tap the short-term debt market. In May this year, credit rating agency Care Ratings rated Rs 17,025 crore of proposed short-term commercial paper at 'CARE A1+'. It also rated planned Rs 15,000 crore issue of non-convertible debentures at 'CARE AAA', with a 'Stable' outlook.

RRVL’s investments could remain elevated in the medium-term, Care Ratings said, adding that its ability to generate a healthy return on capital employed will be critical.

With the transfer of supply chain and warehousing out of its balance sheet, RIL could look at merging RRVL with material subsidiary Reliance Retail to simplify the structure. The RRVL structure includes 78 subsidiaries, 16 joint ventures, and 10 associates.

Post conversion of the Rs 4,000 crore of Non-Cumulative Optionally Convertible Preference Shares into equity shares in Reliance Retail, the minority shareholders now hold a miniscule 0.04%. RIL has been trying to squeeze out these minority shareholders, but have not been able to do so yet.

Ambani plans to list both its consumer-facing businesses in the next few years, but that would mean these ventures will need to have manageable debt, enough cash generation to sustain operations and simplified business structures.

Reliance Industries had a gross debt of Rs 3,24,622 crore, or $38.9 billion, at the end of March 2024. Its standalone gross debt was at Rs 2,11,790 crore, with balance in key subsidiaries including Reliance Retail at Rs 41,317 crore, Reliance Jio at Rs 54,350 crore, Independent Media Trust Group at Rs 7,317 crore and Reliance Sibur Elastomers at Rs 1,612 crore.

On a consolidated basis, RIL has a net debt of Rs 73,845 crore, out of which its retail venture had a net debt of Rs 10,440 crore at the end of March 2024.