After announcing asset sale worth $14 billion and completing $7 billion rights issue in the past two months, Reliance Industries Ltd's next leg of debt-reduction surprise will be driven by its energy business as cash flows are likely to exceed expectations, a report said on Tuesday.
"Deleveraging has played out faster than expected, fuelling rerating. The next leg of growth and surprises should be from volume and margin recovery in energy and retail," according to the Morgan Stanley report.
Over the past two months, billionaire Mukesh Ambani's oil-to-telecom conglomerate has announced the sale of about $14 billion of assets, completed a $7 billion rights issue, and slowed the run rate of new investment by a quarter.
"We expect this to cut net debt (of Rs 1.6 lakh crore) in half by end-FY21, and once the remaining asset monetisation comes to fruition, net debt could be near zero," it said.
The next leg of debt reduction surprise will be driven by energy, as cashflows outperform street expectations, it added.
RIL has started to hive off its oil-to-chemicals entity which comprises of its twin oil refineries at Jamnagar in Gujarat as well as petrochemical units.
"The pace of deleveraging has surprised, but the re-rating is similar to that seen in past deleveraging cycles (2002, 2007)," it said.
Morgan Stanley said fuel demand in India, and globally, is picking up more quickly and petrochemical demand has been more resilient than expected.
RIL's refinery run rates had remained high in the last quarter as it shifted volumes to export markets. The rise in domestic sales should normalise margins in coming quarters apart from improving utilisation rates.
The brokerage saw a significantly better cycle in petrochemicals emerging after COVID-19 and a faster recovery in refining product demand. "Hence, we estimate $2-2.5 billion in free cash flow (FCF) in FY21 despite the current challenges in retail demand and lower oil prices."
With its partnership with Microsoft, its memorandum of understanding (MoU) with Facebook, and its offline retail infrastructure, RIL is looking to capitalise on the untapped market of small and medium scale enterprises, which may look at digitising after COVID-19.
"This will not only raise revenues for digital but also support retail business gain share of the consumer wallet," it said.
The company’s stock is pricing in debt reduction on the digital side, but not the recovery in demand after COVID-19 in consumer retail domestically and refined products globally, it added.
Morgan Stanley saw multiple triggers of volume normalisation and margin increases across RIL's business supporting EBITDA growth after COVID-19.
"Deleveraging of the balance sheet should also support multiples and boost earnings compound annual growth rate to 23 percent for FY20-FY23 - a third of it driven by the energy business, a third by reducing debt, and a third by telecom and retail."
It saw multiple triggers – asset sales (telecom infrastructure, fuel retail), pickup in energy cashflow, increased traction in omni-channel retail and rise in telecom per user revenues.
"We see potential debt reduction of $22 billion in the next nine months given the completion of the sale of a 50 percent stake in retail fuel stations to BP, completion of stake sale in Jio Platforms and tower InViT stake sale and positive free cash flow (FCF) generation from steady energy utilisation and slowing investments," it said.
The on-track sale of a stake in the oil-to-chemicals business to Saudi Aramco and remaining rights issue proceeds should also further reduce liabilities.
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