India's largest company doesn't want to owe money

Last week we spoke about how Jio Platforms, the holding company of India’s largest mobile telephone operator, has become a “platform to bring together global private equity firms”.

In the space of less than a month, the privately held firm had announced 10 new rounds of investment, raising ₹1.04 trillion ($13.6 billion) in the process. Now the proverbial cricket (or football, or hockey) team of investments is complete, with Saudi Arabian sovereign wealth fund PIF putting in ₹114 billion (OK the analogy isn’t exactly accurate since 10 companies account for the 11 rounds, with Silver Lake having invested twice).

The latest investment, like most of the previous ones, gives Jio Platforms an equity valuation of Rs4.91 trillion and an enterprise value of Rs5.16 trillion.

This takes the total investment by foreign investors in Jio Platforms to Rs1.15 trillion rupees for a 24.71% combined stake in the company.

Besides PIF, the list of 10 investors in Jio now includes Facebook; six private equity companies namely General Atlantic, TPG, KKR, Silver Lake, L Catterton, Vista Equity Partners and two sovereign funds of Abu Dhabi -- Abu Dhabi Investment Authority and Mubadala Investment Company.

We had noted that the reason Jio Platforms was raising so much money was to allow its parent Reliance Industries to become debt-free.

So why is Jio Platforms raising so much money now? Moody’s suspects that it is to help its parent Reliance Industries to pare its debt. 

In its Annual General Meeting (of shareholders) in August 2019, Reliance Chairman Mukesh Ambani had announced an ambitious plan of bringing down the company’s debt to zero by March 2021. Now, it appears Ambani is on track to completely deleverage his firm by December 2020 itself, going by a report in the Economic Times.

Last week, Ambani formally declared this.

“I have fulfilled my promise to shareholders by making Reliance net debt-free much before our original schedule of 31 March," chairman and managing director Ambani said in a statement on Friday.

At Reliance’s 42nd annual general meeting last August, Ambani pledged to make the company net debt-free by 31 March 2021. Ambani also plans to list Reliance Jio and Reliance Retail in the next five years.

Reliance’s shares surged to a record  ₹1,738.95 and the company became the first in India to be valued at  ₹11.52 trillion. The shares have doubled in the past three months.

This has happened despite the planned stake sale to Saudi Aramco not yet going through.

The fund-raising included the country’s largest rights issue of ₹53,124.20 crore and a series of secondary stake sales in Jio Platforms to a clutch of foreign tech giants, such as Facebook, as well as private equity and sovereign wealth funds such as KKR, TPG and Saudi Arabia’s Public Investment Fund. 

Net debt refers to the amount of debt on the balance sheet after accounting for cash. 

RIL’s net debt stood at ₹161,035 crore as on March 31, and the funds raised through the rights issue and stake sales in Jio Platforms exceed that amount. Along with the stake sale to BP in the petro-retail joint venture, the total funds raised are in excess of ₹1.75 lakh crore, the company said. 

The recent bull run in RIL’s share price means that the company has become India’s first to exceed a market cap of ₹11 trillion. Why does this seemingly odd figure seem important?

At closing price of Rs 1,760, RIL is valued at Rs 11.15 trillion. If one adds value of partly paid shares of Rs 67,500 crore, the company’s m-cap adds up to almost Rs 11.83 trillion. In dollar terms, RIL’s m-cap translates into $155 billion, making it the 54th largest company globally.

Because adding in the value of partly paid shares, this takes RIL’s market cap beyond $150 billion, admittedly a more round number than ₹11 trillion.

While Ambani has declared that RIL is debt-free, a statement that perhaps led to the recent bull run, analysts are not so sure. For one, most of the funds will only be received in the next financial year. Moreover, in his statement, Ambani may not have taken into account some liabilities.

In any case, it’s important to remember that there already exists a wide gap between RIL’s reported net debt and estimates of its net debt by credit rating agencies and brokerage analysts.

Analysts at CLSA, Bernstein, Kotak Institutional Equities, Goldman Sachs and Nomura pegged the company’s net liabilities at between  ₹2.4 trillion and  ₹2.6 trillion in FY20.

They included deferred spectrum liabilities and capex creditors to arrive at their estimate of net debt. Some analysts also add debt transferred to the fibre investment trust (InvIT) and end up with an even higher net liabilities figure.

Even so, the extent of fundraising is substantial and RIL’s debt will reduce meaningfully.

Moreover, all the 11 deals that Jio Platforms has concluded in the last two months need to go through regulatory approval. The most stringent scrutiny will fall on the Facebook investment, whose case has already been taken up by the Competition Commission of India (India’s antitrust watchdog).

The Indian watchdog declined to elaborate the aspects of its examination, but told the outlet that it assesses every deal that could misuse users’ data and may consider amending the current rules for some mergers and acquisitions in the country.

The proposed investment is already causing jitters in India’s tech startup community, and they have planned to file an appeal with the CCI already.