Reliance liabilities jump to $65 billion, Credit Suisse waves red flag

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Mumbai | Updated: August 6, 2019 7:05:32 AM

According to CS, RIL has been FCF negative for the past six years and this has resulted in financing liabilities increasing from $19 bn in FY15 to $65 bn in FY19.

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Shares of Reliance Industries (RIL) fell 3.48% on Monday, as Credit Suisse downgraded the stock to ‘underperform’.

The brokerage said that the company is expected to remain free-cash flow negative over FY20-21 too, just as it has been for the last six years, given that its liabilities have dramatically gone up to $65 billion in FY19 from $19 billion in FY15.

RIL’s total liabilities, as disclosed in its annual report, include debt, higher crude payables, customer advances, capex creditors and spectrum payouts, said Credit Suisse analysts.

According to CS, RIL has been FCF negative for the past six years and this has resulted in financing liabilities increasing from $19 bn in FY15 to $65 bn in FY19.

During this period, the company’s net debt has increased from $2.7 billion to $12.4 billion. Additional debt at the consolidated balance sheet rose from $9.4 billion to $20.6 billion. Interest cost for the company has risen to a whopping $4 billion in FY19 (including both reported and capitalised interest cost) from $1.2 billion in FY15, which was a high 44% of Ebit.

Listing out key takeaways from the company’s annual report, the Credit Suisse report said RIL’s crude payable days are at 121 days (2-4x of peers). RIL’s customer advances are at $5.9 billion (FY17: <$2 bn) and are 10% of sales. Retail shows lease rentals of $300 m on Jio devices but the impact is offset by service income of $1.3 billion, which is 40% of retail gross profit. Capitalised expenses on the other hand were $2 billion.

Refining asset useful life useful life extended from 15-25 years to 25-40 years and this will lower depreciation. The company’s mix of foreign currency debt now stands at 40% against 60% in FY17. Credit Suisse has given Jio an enterprise valuation of $46 billion, which factors in RoCE increase to 9% in FY25 through price increase and monetisation of customers through new commerce.

The reason why RIL’s crude payable days are significantly higher than local and global peers is due to its crude sourcing strategy. In calendar year 2018, the company sources 25% of crude from Venezuela and Mexico against 3% sourced by BPCL, HPCL and IOC. The state-owned oil marketing companies source a large part of their crude from Iran and Iraq. The analysts believe that since RIL alone procures 20% of Venezuela crude production, however, the sourcing has not changed materially in the last five years. On the upside, RIL has capitalised $2 bn expenses in FY19, which should decline going forward as most as most of the pet-coke gassifiers are commissioned and the company is in the process of ramping up.

Interestingly, the current valuations of Jio factor in a price increase of 50% or monetisation through other means. Credit Suisse values Jio at an enterprise value of $43 bn. Jio’s capital employed per user is estimated at $105 (excluding capitalised expenses). Jio’s Ebitda per user has to double from $9.2 to be accretive on cost of capital. Tariff normalisation with industry peers is likely by FY25, if Jio increases prices.

Currently Jio’s plans are at a 25% discount to peers. Given that the sharp increase in liabilities, weak ARPU growth for Jio in Q1FY20 and lowering of multiples for the refining business, the stock could remain under pressure in the near-term.

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