The ₹53,124-crore rights issue of Reliance Industries (RIL) — in the ratio of one rights share for every 15 existing shares — opened on May 20 and will close on June 3.
Shareholders as on May 14 (the record date) are eligible to subscribe to the rights issue.
The rights issue price of ₹1,257 a share is at a discount of ₹175 (about 12 per cent) to RIL’s current stock price of ₹1,432. It may be worthwhile for existing shareholders to subscribe to the rights issue for a few reasons.
One, the discount offered in the stock price and valuation seem reasonable. While the RIL stock has rallied more than 60 per cent from its March 2020 low of ₹884, it is still below its December 2019 peak of ₹1,610.
At the current market price of ₹1,432, the stock’s trailing 12-month price-to-earnings ratio is about 23 times higher than its three-year average of 19 times; the higher valuation is driven by the 37 per cent dip in reported earnings in the March 2020 quarter caused primarily by inventory write-down due to the oil and petro-products price crash.
Adjusted for such exceptional items, the stock’s current valuation is about 20 times, a tad higher than historical averages.
At the discounted rights issue price of ₹1,257, the stock’s price-to-earnings ratio is about 20 times reported earnings and 18 times adjusted earnings — not cheap but not costly either.
Two, the shareholding of the existing public shareholders will get diluted if they do not participate in the issue. There could be a strong appetite for the rights issue entitlement, going by the jump in the trading premium for these entitlements in the secondary market.
Besides, the promoters (the Mukesh Ambani family and related entities) who own a 50.07 per cent stake in the company as of March will be subscribing to their full entitlement of the rights issue, and have said they will also subscribe to all the unsubscribed portion.
Three, the staggered payment schedule for subscribing to the rights issue — 25 per cent (₹314.25 a share) on application, 25 per cent (₹314.25) in May 2021 and the balance (₹628.50) in November 2021 — means the entire money need not be blocked upfront.
The partly paid-up rights shares will also be listed and traded, until they become fully paid-up.
Four, RIL has been moving fast to address concerns about its debt reduction and balance-sheet deleveraging plans. Over the past month or so, despite the market disruption, RIL has sold about 17.1 per cent in Jio Platforms (its digital business holding company) for nearly ₹78,562 crore at top-dollar valuations to marquee technology players and investors — Facebook, Silver Lake, Vista Equity Partners, General Atlantic and KKR.
A good portion of these proceeds is expected to be used to repay debt. This has been a key driver for RIL’s stock price rally over the past two months. More stake sale deals in Jio Platforms could be on the cards.
The major portion of the rights issue proceeds will also go towards debt repayment.
The objects of the rights issue say that ₹39,755 crore in total (₹13,193 crore from the first instalment) will be used to repay debt.
These steps, along with others, and a tapering of the capex plan should help RIL in its goal of becoming net-debt-free by March 2021. The company’s net debt (debt less cash) as on March 2020 was about ₹1.6-lakh crore. The company’s debt-to-equity ratio as of March 2020 is 0.74 times.
Five, there could be value unlocking in the consumer-facing businesses — digital and retail — in the future through initial public offerings; this could translate into an upside for the RIL stock.
Six, even if the proposed stake sale of 20 per cent in the refining and petrochemical business to Saudi Aramco does not go through due to the oil price crash, RIL seems well-positioned on its debt-reduction plan, thanks to the Jio Network deals.
The Saudi Aramco deal was expected to give RIL about $15 billion (about ₹1-lakh crore). While RIL says that the due diligence by Saudi Aramco is on track as both the parties are committed and actively engaged, there remains a risk of a back-off or delay by Saudi Aramco with its finances taking a knock due to the oil rout.
If and when the deal fructifies, that will boost RIL’s balance-sheet. In this context, RIL’s plan to carve out the oil-to-chemicals business into a separate company holds significance.
Seven, RIL’s hedged business model should hold it in good stead amid the upheaval in the global and Indian economies due to the coronavirus impact.
The past few years, the company has been increasing its focus on the consumer-facing businesses — including digital and retail — with the plan of these segments eventually achieving an equal footing on profit contribution with the hydrocarbons businesses (refining and petrochemicals). From 2 per cent in FY2015, the share of the consumer businesses in the company’s operating profit increased to 35 per cent in FY 2020.
This has helped. Over the past few quarters, RIL’s consumer-facing businesses have been doing quite well compared with the hydrocarbons businesses that have been on the back foot. This is likely to continue with the turmoil in oil, refining and petrochemicals markets that has resulted in cuts in both volumes and margins.
The digital business is better positioned, given the growing need for connectivity. Also, some parts of the retail business, such as groceries and staples, should do well.
In FY20, despite a weak March 2020 quarter, RIL’s consolidated profit (before exceptional items) grew about 11 per cent y-o-y to ₹44,324 crore — driven by the digital and retail segments that offset weakness in the hydrocarbons businesses. Profit after exceptional items during the year was flat at ₹ 39,880 crore.
The Covid-19-related disruption and crash in prices of petro-products may hurt the refining, petchem and a good portion of the retail business in the June 2020 quarter and beyond. The company’s financial muscle should help it weather the storm though.
Also, its integrated oil-to-chemicals business and plans to convert most of the crude oil into chemicals should help the hydrocarbons business when the cycle turns.
Eight, digital businesses may be big gainers in the post-corona world and RJio’s quick rise over the past few years to dominate the Indian telecom market positions it well to make use of the opportunity.
RIL’s ambitious expansion plans in the digital business including in e-commerce and new commerce, targeting mom-and-pop stores, should get a boost from the alliance with Facebook and the wide reach in India of its group company WhatsApp that plans to launch its payment platform.
Shareholders who do not intend to subscribe to the rights issue can renounce (sell) the whole or part of their entitlement through the stock market route (On Market renunciation) until May 29. Off Market renunciation can be done later, too, but such that the entitlements are credited to the renouncee’s (buyer’s) demat account on or before the issue closing date.
Rights entitlements that are neither renounced nor subscribed by investors on or before the issue closing date shall lapse and be extinguished.