Reliance Industries’ Net Debt May Fall Despite Low Demand And Delay In Asset Sales: Morgan Stanley

Billionaire Mukesh Ambani-led Reliance Industries Ltd.’s net debt will fall even if energy and retail demand struggles for six months and the planned asset sales are delayed, according to Morgan Stanley.

Also, RIL can re-prioritise investment, potentially slowing capex by up to a third. Beyond Covid-19, RIL emerges stronger as competitors face high debt challenges and slow investments, Morgan Stanley said in a research report.

With the outbreak of coronavirus impacting economies globally, RIL faces multiple challenges -- oil prices have declined along with a fall in global oil product demand as a result of the lockdown across India and multiple geographies, potential slowdown in fashion/electronics demand for its retail segment, slower monetisation of telecom investments, and still relatively high debt post the investment cycle.

Consequently, RIL's share price has dropped 21 percent year-to-date, but still out-performed the market by 7 percentage points.

Morgan Stanley said the timing of normalisation is unclear, and every month of these challenges negatively affects RIL sales volumes across all its businesses.

But competition is struggling even more, and cyclical businesses could get more medium-term tailwinds as capacity growth globally slows.

Morgan Stanley said the decline in global energy demand and expansion in credit default swap spreads for RIL, to 290 bps over the past month, have raised investor questions about the company's balance sheet leverage. "Per our assessment, RIL's net debt (including other liabilities) would remain stable in FY21, if the Covid-19 situation were to persist for six months and recover only slowly thereafter."

RIL, it said, has the flexibility to prioritise its investments in FY21, and could thereby reduce cash outlay by 25-30 percent. Still, capex on ongoing upstream gas production, telecom spectrum renewal, and maintenance may be required.

Stating that RIL's net debt might not rise in 2020-21, Morgan Stanley said its analysis suggests limited liquidity challenges even if the company's utilisation rates and margins remain challenges in its cash cow energy business.

Also, about half of RIL's debt and liabilities are largely dollar-funded, hedged via its dollar-linked energy cashflows. However, RIL could raise debt, as some of its creditor liabilities fall due or for refinancing.

"We expect Reliance to gain market share with better profitability as the current demand decline is driving global refiners and oil majors alike to reassess growth plans to conserve cash. This provides a significant headstart for RIL, which has expanded and upscaled its capabilities over the past five years and now is among the top quartile on the cost curve," it said adding oversupplied oil markets as chemical/ refinery markets tighten are a significant tailwind, as well.

Its strong energy backed cash-flows should help gain market share faster in offline retail and telecom segments, as competition conserves cash, it added. "RIL's net debt will fall even if energy and retail demand struggles for six months and asset sales are delayed."

RIL has consolidated net debt and liabilities of $46.2 billion and an annual pre-tax profit of $13.6 billion.

The company has previously announced plans to monetise many of its assets, including holdings in energy, telecom, and content businesses. These plans, if executed, could lower debt by about $39 billion, but would also lower earnings by 16 percent.

Saudi Aramco is still conducting due diligence on a potential investment in RIL's oil-to-chemicals operation.