Reliance Loses Zero-Debt Status As Expansion Plans of Units Gain Ground 2023
Reliance Industries (RIL), which had no debt in FY21, gained a significant amount of debt during the course of the last two fiscal years, mostly as a result of the development ambitions of its two subsidiaries, Reliance Retail Ventures (RRVL) and Reliance Jio Infocomm (RJio).
The net debt of the Mukesh Ambani-led company increased to Rs 34,815 crore in FY22, and it dramatically increased to Rs 1.26 trillion in FY23. It increased slightly to Rs 1.27 trillion in the June quarter.
According to information obtained from the Bombay Stock Exchange, RIL’s cash and cash equivalents decreased at the same period, from Rs 2.5 trillion in FY21 to Rs 2.31 trillion in FY22, and then to Rs 1.88 trillion as of FY23.
The subsidiaries of RIL were responsible for driving up the net debt; as of FY23, they had a total net debt of Rs 98,143 crore, up 226% from Rs 30,113 crore. The firm with the largest effect was RRVL, which reported a net debt of Rs 46,644 crore in FY23, up 417% from the Rs 9,030 crore reported in FY21.
Similar results were reported by RJio, whose net debt increased by 228.70%, from Rs 11,196 crore in FY21 to Rs 36,801 crore in FY23.
“RIL’s subsidiaries were investing heavily on capex for their expansion goals. The reasons for RJio’s success would have been expenditures in 5G, the development of telecom and digital services, and subscriber growth, whereas comparable retail activities led to rising net debt, according to one analyst following the firm.
The debt level is not concerning because RIL has a strong cash position and profitability, and company revenues are still coming in, he noted.
The rollout of 5G was a part of RJio’s growth ambitions ever since its commercial launch in September 2016. RIL’s CMD Mukesh Ambani had previously (2022) declared a 2 trillion investment in 5G services, with plans to roll them out in major cities by Diwali and nationwide by December 2023.
RRVL was a similar situation. As of June 30, 2023, the retail division of RIL had 5,735 more shops overall than it had at the end of FY21, for a total of 18,446 outlets. General Atlantic, KKR & Co., Silver Lake Partners, the sovereign wealth funds of Saudi Arabia, Singapore, and the United Arab Emirates, among others, helped Reliance Retail finance a total of Rs 47,625 crore from international investors in 2020.
While Reliance Sibur Elastomers defied the trend by cutting net loss, other subsidiaries, such as Independent Media Trust Group, have also been reporting an increase in net debt. As of FY23, the media group’s net loss increased from Rs 2,414 crore to Rs 5,815 crore, whereas that of
Reliance Sibur Elastomers had a decrease from Rs 2,339 crore in the prior comparable quarter to Rs 2,144 crore.
Since FY13, when it reported a loss of Rs 22,832 crore, RIL’s net debt has steadily increasing, reaching 1.6 trillion in FY20 until it became a net zero debt company in FY21.
In a surprising turn of events, Reliance Industries Limited (RIL), the Indian conglomerate, has relinquished its much-touted “zero-debt” status. This development comes amidst RIL’s aggressive expansion plans, particularly in its various units such as telecommunications, retail, and energy sectors. The move raises questions about the long-term financial strategy of one of India’s most valuable companies and the potential implications on its stakeholders.
Reliance Industries had achieved its zero-debt status in 2020, drawing attention from industry experts and investors alike. The achievement came largely through a series of stake sales in Jio Platforms, its telecom and digital services arm, and through a rights issue. The feat was particularly noteworthy given the global economic conditions at the time, hit by the COVID-19 pandemic.
RIL’s various business units have been on a rapid expansion trajectory. For instance, its retail unit, Reliance Retail, has been making aggressive acquisitions and opening new stores, while Jio has been expanding its 4G and 5G infrastructure and diversifying into new digital services.
The competitive landscape in industries like telecom and retail is evolving rapidly, requiring substantial investments to maintain and grow market share. Given the ambitious nature of RIL’s projects, taking on some level of debt appears to be a strategic move to fuel these expansion plans.
With interest rates at relatively low levels, borrowing costs are less punitive. This makes it an attractive option for companies looking to invest heavily in their growth.
While the news led to some jitteriness among investors, causing a temporary dip in RIL’s stock price, experts believe this is a calculated risk. The investments made using these debts are expected to provide high returns, thus justifying the move.
Although taking on debt generally poses a risk of downgrading credit ratings, major rating agencies have maintained their ratings for RIL, given its strong earning potential and robust business model.
The success of RIL’s strategic shift from a zero-debt company depends on the successful execution of its expansion plans. The move is deemed high-risk, high-reward. Should the various units succeed in capturing more market share and generating higher revenue, RIL could quickly offset its new financial liabilities.
Reliance Industries Limited’s move away from its zero-debt status marks a strategic shift in its financial management, driven by ambitious expansion plans across its diversified business units. While it does expose the company to higher financial risk, the robustness of its units and the current low-interest-rate environment could make this a smart, long-term play. Only time will tell if this gamble pays off, but it certainly marks a new chapter in the conglomerate’s journey.
