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Facebook-Jio deal: Inside Reliance's Rs 1.53 lakh crore debt resolution plan

RIL has invested nearly Rs 4 lakh crore since 2010 to create the Jio digital ecosystem. However, the deal will help Mukesh Ambani to execute his plan to make RIL a net debt free company.

twitter-logoNevin John | April 23, 2020 | Updated 07:53 IST
Facebook-Jio deal: Inside Reliance's Rs 1.53 lakh crore debt resolution plan
Facebook's Rs 43,574 crore investment is not a giant deal, considering the money spent to create Reliance Jio

KEY HIGHLIGHTS

  • RIL's net debt stands at Rs 1.53 lakh crore
  • RIL has invested nearly Rs 4 lakh crore since 2010 in Jio
  • Final realisation from Facebook-Jio deal will be around Rs 38,000 crore, say experts
  • In the last financial year, RIL's finance costs doubled to Rs 16,495 crore

Facebook's Rs 43,574 crore investment is not a giant deal, considering the money spent to create Reliance Jio, but is an important one at a time when coronavirus has destroyed economies and businesses. Reliance Industries (RIL) has invested nearly Rs 4 lakh crore since 2010 to create the Jio digital ecosystem. However, the deal will help chairman Mukesh Ambani to execute his plan to make RIL a net debt free company.

After the capital gains and income tax, the final realisation from the deal will be roughly Rs 38,000 crore, according to experts. "It will be almost the same as the investment that RIL made to create the asset, without any premium," a tax expert said.

Also read: Facebook-Jio deal: FB investment values Jio Platforms at record Rs 4.6 lakh crore; 5th largest in m-cap

RIL's share price jumped by nearly 6 per cent to Rs 1,306 at 10am, post the announcement of Facebook deal.

The deal with Facebook is not RIL's biggest. In 2011, the UK petroleum company BP Plc bought a 30 per cent stake in oil and gas exploration blocks operated by RIL for $7.2 billion in cash. But BP had to write off a part of its investments later because of the heavy losses from exploration and production business.

On August 11, RIL Chairman Mukesh Ambani told shareholders at the annual general meeting (AGM) that the company had invested Rs 5.4 lakh crore in the last five years. Of this, Rs 3.5 lakh crore (until then) went into building Jio. Another Rs 1 lakh crore was invested for petrochemical expansion.

Also read: Facebook-Reliance Jio deal: Social media giant pumps in Rs 43,574 crore in Mukesh Ambani's telco; 10 points

Ambani said that the investment cycle for telecom was complete and the company was adding over 10 million new customers every month. Jio added 370 million customers in just three years of operations until December.

But the massive investment has meant that the company's gross debt has risen dramatically in the last decade: it shot up six times to Rs 3.06 lakh crore. After deducting the Rs 1.53 lakh crore cash in hand in December, the net debt stood at Rs 1.53 lakh crore. It was when the debt touched inflection point, Ambani presented the debt reduction plan at the AGM, saying he wants to make RIL "a zero net debt company" by March 2021.

These massive investments have increased RIL's total finance cost, a major part of which is interest payments. In the last financial year, finance costs doubled to Rs 16,495 crore compared to the previous year. According to analysts, interest payments are going to be higher in the forthcoming years and this can affect the company's profitability in turbulent economic conditions.

Also read: Facebook-Jio deal: Reliance Industries stock gains over 8% after Facebook buys 10% stake in telco arm

The first step to reduce debt was taken by RIL in early 2019, when it formed two Infrastructure Investment Trusts (InvITs) - Digital Fibre Infrastructure Trust and Tower Infrastructure Trust. RIL transferred Reliance Jio Infratel's fibre and tower businesses into these trusts along with a gross debt of Rs 1.07 lakh crore.

An affiliate of Brookfield Asset Management invested Rs 25,215 crore in the Tower Infrastructure Trust, which has 51 per cent stake in Reliance Jio Infratel. Ambani said, "We transferred our telecom infrastructure assets to two separate infrastructure trusts for a consideration of Rs 1.25 lakh crore... Post this, we ended last year with net debt of Rs 1,54,478 crore".

The second deal is to sell 20 per cent stake in RIL's oil and petrochemicals business - which has two refineries and a petchem complex in Jamnagar, Gujarat to Saudi Aramco for Rs 1.1 lakh crore. But the deal is likely to get delayed because of coronavirus and the crude price crash--the American crude is trading at negative value, while Indian Basket and Brent hover around $20 a barrel.

Also read: Facebook buys 10% stake in Reliance Jio: Here's what Mark Zuckerberg, Mukesh Ambani have to say

Ambani also wants to sell the stake in optical fiber trust. But he has not zeroed in on the buyer.

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