Credit Suisse Takes U-Turn On RIL Following Its Oath To Become Debt Free In 18 Months
Credit Suisse, the global brokerage house took a U- turn on Reliance Industries on August 19 following a downgrading stock and cutting price target on August 5. The brokerage upgraded its rating on RIL to neutral. It also raised price target to ₹1,210 from ₹1,028 earlier after reading and analysing the speech of Chairman and MD Mukesh Ambani.
The brokerage factored in the stronger balance sheet with debt reduction of $22 billion till FY21, and low capex intensity guidance and higher Jio valuation.
On August 5, the brokerage downgraded Reliance Industries to underperform (from neutral) and cut target to Rs 995 (from Rs 1,350) on rising debts and interest cost in last four years.
Its target price cut had factored in (1) higher liabilities of $10 billion from crude payables, JioPhone financing and East-West pipeline; (2) multiple cuts and lower earnings for refining; (3) slow enterprise roll-out and weak Jio ARPU in Q1FY20.
“RIL has been free cash flow (FCF) negative for six years and given margin pressure in refining and petrochemical (high supply), FCF should be negative for FY20-21. Total liabilities are already up from $19 billion (FY15) to $65 billion (FY19) (debt, higher crude payables, customer advances, capex creditors, spectrum liabilities, JioPhone financing and East West (EW) pipeline) and are 40 percent of enterprise value,” it had said in its report earlier.
Total interest cost has increased to $4 billion in FY19 against $1.2 billion in FY15 and was equivalent to 44 percent of EBIT, it had added.
The reason for taking U-turn in rating as well as the target was the strong outlook from Mukesh Ambani in his speech while addressing the company’s 42nd Annual General Meeting on August 12.
“We have a very clear roadmap to becoming a zero net debt company within the next 18 months that is by March 31, 2021. After around Rs 3.5 lakh crore spending on Jio, the investment cycle for Jio is now complete,” he said.
Last year, Reliance had transferred telecom infrastructure assets to two separate infrastructure trusts for a consideration of Rs 1.25 lakh crore with the intention of raising this money from large global institutional investors.
For the same, it has received strong interest and commitments from reputed global investors and are confident that these transactions will be completed by the end of this Financial Year, Ambani said, adding post this, company ended last year with net debt of Rs 1,54,478 crore.
He said Saudi Aramco would buy 20 percent stake in RIL’s oil-to-chemicals (02C) division, at an enterprise value of $75 billion. Reliance also signed an agreement with BP for investment in KG-D6.
“We expect to complete these transactions within this financial year subject to definitive agreements, due diligence, regulatory and other customary approvals. The commitments from these two transactions are about Rs 1.1 lakh crore,” he said.
The company also received strong interest from strategic and financial investors in consumer businesses, Jio and Reliance Retail, and it will also evaluate value unlocking options for real estate and financial investments, he added.