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Business News/ Industry / Energy/  Market underappreciating RIL’s deleveraging efforts: UBS
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Market underappreciating RIL’s deleveraging efforts: UBS

UBS estimates that with organic cash flows, RIL could easily deleverage by FY23-end, or as early as end of FY21
  • RIL could see continuous decline in its capital expenditure, with FY20-24 capex about 56% lower than FY15-19 levels
  • RIL has been focussing on deleveraging. (Photo:Reuters)Premium
    RIL has been focussing on deleveraging. (Photo:Reuters)

    MUMBAI: Reliance Industries Limited's (RIL) efforts to deleverage have largely remained under-appreciated even as the exercise could free up more than $20 billion by end of FY21 for the oil-to-telecom conglomerate, according to a research report by UBS.

    "The market seems to under-appreciate the company's debt reduction plans, and appears especially cautious about the proposed deal with Saudi Aramco. Based on our analysis of the upside/downside scenarios for the individual segments, we think the incremental contribution from RIL's consumer businesses is not factored into the share price. Investors seem to be overly concerned about commodity headwinds despite RIL's feedstock diversification and integration across various products," UBS said in a report on Monday.

    UBS estimates that with organic cash flows, RIL could easily deleverage by FY23-end, or as early as end of FY21, with the potential conclusion of the Saudi Aramco deal for a 20% stake in RIL's oil-to-chemicals (O2C) segment. Despite the move towards deleveraging and higher earnings mix from consumer segments, RIL's valuation multiples (PE and EV/EBITDA) have largely remained flat for FY18-20.

    "We estimate asset restructuring could free up more than $20 billion by end-FY21 for RIL, which includes completed deals of: $1bn with BP for fuel retail marketing JV; transfer of $15bn debt to tower/ fibre infra trust (InvIT); as well as proposed deals of a letter of intent (LOI) with Saudi Aramco for a 20% stake in RIL's O2C division for $15bn; and creation of a digital platform entity for early monetisation," the report said.

    RIL, which is moving towards a leaner balance sheet through partnerships and stake sales, could see continuous decline in its capital expenditure, with FY20-24 capex about 56% lower than FY15-19 levels, as most of the capital intensive expansions are complete.

    "We believe RIL has started to move on a sustainable path to deleverage, driven by lower capex (which peaked in FY19), higher operating cash flows from its oil-to-chemicals (O2C) and digital businesses, and management's ability to enter into partnerships/stake sales," UBS said.

    Higher consumer business earnings have offset the cut in O2C earnings, once again. RIL has continued to improve its earnings mix (36% in FY20E) in favour of consumer segments (digital and retail), driven by an increase in telecom ARPUs (post tariff hikes) and higher retail EBIDTA margins (accruing from benefits of scale).

    "We expect the strong performances of the new-age consumer businesses to continue, with EBITDA share of consumer businesses in overall consolidated EBITDA to increase to 41% in FY21 and 44% in FY22, compared with 24% in FY19," UBS added.

    On Monday, shares of RIL on the BSE closed at 1446.60, down 2.6%.

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    Published: 24 Feb 2020, 04:19 PM IST
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