Reliance Industries, India's most valuable company, is in the midst of a transformation - its fourth this century. Chairman Mukesh Ambani is probably deserving of more shareholder love than he is getting right now.
Delayed gratification can be a tough sell, but Reliance secured board approval last week to raise up to 200 billion Indian rupees (equivalent to $2.5 billion) to pay short-term debt maturities and double down on its 5G cellular rollout, new energy ventures, and retail expansion. With high interest rates, this move will help the company stay afloat and continue to grow in the future.
On the same day, the oil-to-telecom conglomerate said net profit fell 15% to 157.9 billion rupees in the quarter ended Dec. 31, mainly hurt by windfall taxes levied by the government on its refined product exports. The company said the taxes have hit its bottom line hard, and it is working to mitigate the impact.
The disclosures showed that debt service costs had increased by 36% during the quarter, as the total amount of outstanding borrowings had increased significantly. According to estimates from Morgan Stanley, the maturity of loans and cash flow generation imply that nearly $25 billion of bonds will need to be refinanced in the next three years. The company had $12.5 billion in capital expenditures in the first nine months of the year. Unsurprisingly, the shares of the diversified conglomerate have remained relatively unchanged over the past year.
Reliance's shares may not remain undervalued for long. With a market capitalization of about $200 billion, the shares fetch just 20 times prospective earnings—a ratio that has been coming down since the height of the pandemic, when they touched almost 30. Peer Adani Group's flagship company Adani Enterprises is trading at a much higher multiple of about 131 times earnings.
Reliance Industries' debt-to-EBITDA ratio stands at 1.46, which is half of what it was during the last investment cycle for the launch of its telecom business. This indicates that another growth engine can be kick-started with interim investment, despite elevated debt servicing costs and tight monetary conditions. Adani Enterprises' debt-to-EBITDA ratio, on the other hand, is much higher at 5.78 times.
Morgan Stanley believes that, in contrast to the past three cycles, Reliance's operating cash flow will be only slightly lower than its projected $47 billion investment spending planned over the next three years. According to the bank, the upcycle in refining, improving domestic natural-gas production and higher chemical margins should more than support $16 billion in annual investments with a minimal rise in debt ratios.
Reliance has committed $25 billion of investment to provide 5G coverage to the remotest corners of India by December this year. This will make 5G more affordable than anywhere else in the world. In addition, Reliance has committed $75 billion to clean energy projects over the next 15 years.
Over the past two years, the conglomerate has expanded its retail business, adding nearly 6,000 stores to its footprint. The company has seen success in its core businesses even as it allocates more capital to new ventures. For example, refining margins shot up after Russia invaded Ukraine, as discounted crude flowed to India.
As the Fed tightens monetary policy, aggressive capital allocation by companies is making shareholders nervous. However, a little more patience and a closer look at the financials should give them some peace of mind.
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