Published: 11:12 PM, 14 August 2019 Last Update: 11:27 PM, 14 August 2019
DoesMukesh Ambani see dark clouds gathering on the horizon? From his message toshareholders, it doesn’t look like India’s richest tycoon is worried. But hisactions may reveal more than his words.
AtMonday’s annual general meeting, the chairman of Reliance IndustriesNSE 1.06 percentLtd. was brimming with optimism. Not only did he endorse Prime MinisterNarendra Modi’s vision of bumping up annual GDP by 80 percent in five years to$5 trillion, he even forecast a $10 trillion Indian economy by 2030. It’s notonly possible but “inevitable,” he said.
Somethingdoesn’t add up. If the outlook is so rosy, why is Ambani hitting the brakes ona seven-year, $100 billion investment spree across refining, petrochemicals,telecom and retail? While a breather after such frenzied activity may beunderstandable, why does he want Reliance to be a zero-net-debt company in 18months? What will it mean for the more than 100 banks and financial institutionsaround the world that provide India’s largest company and its subsidiaries withbillions of dollars – and yen, and rupees – in financing and refinancing? Aboveall, what will Reliance’s deleveraging mean for India?
Inretrospect, I tackled the last question prematurely in October 2016 whenReliance was shouldering 13 percent to 14 percent of the entire investment byIndia’s top 1,250 listed companies as well as Indian Railways and state-ownedelectricity boards. My conclusion then was that if Ambani took a yearlongvacation, India’s growth outlook could dim. What I didn’t anticipate was thatstarting a 4G mobile network with lifetime free voice calls and dirt-cheap datawas just the beginning rather than the end of Ambani’s telecom ambitions. Thegoal of Reliance Jio was to acquire at least half of India’s 1 billion-plusmobile customers, and that required continued spending.
Nowthat he’s reached 340 million subscribers, though, the endgame is probably notmore than a few quarters away. And that’s problematic for the economy. The restof India Inc. is paralyzed by debt and self-doubt; consumers are overstretched;and so is the government. A holiday for Reliance would remove from play theonly domestic balance sheet with unspent firepower.
Theinvestment cycle for the Jio network is complete, Ambani told shareholders. Inother units, too, there’s little left to do. Ambani is selling 20 percent ofthe family jewel – Reliance’s refining and petrochemical operations – to SaudiArabian Oil Co. even though the goal is more strategic than just shedding debt.As my colleague David Fickling wrote, the $75 billion enterprise value at whichAramco is investing is a lot higher than the business is worth. Saudi Arabiawants takers for its surplus oil in a world of electric vehicles, and ifReliance’s refinery can provide a profitable outlet for 500,000 barrels per dayof Saudi crude by converting it into jet fuel and polymers, then Ambani isdoing the right thing by taking Aramco’s money.
A$22 billion reduction in net debt (to reach zero) will require more thanAramco’s cash. Reliance has shoved some borrowings into an infrastructure trusttogether with telecom tower and fiber assets. It’s also taken on BP Plc as apartner in Indian fuel retailing and oil exploration. If Ambani findsdeep-pocketed partners for general retail, as well as for telecom, reaching hisgoal will be simple enough. Banks, however, will rue the end of his debt-fueledexpansion if loan syndication deals are only for refinancing and not new money.As for shareholders,Ambani is telling them that hitting zero net debt will come with higherdividends, bonus issues and other goodies “at a more accelerated pace than anytime in our history.” But investors will struggle to reinvest the cash returnedby Reliance. For one thing, India’s slowdown is deepening. For another, thecompany’s digitization blitz is causing unpredictable disruption. A day afterReliance told shareholders that they could watch movies on their new homebroadband the same day as the cinema release, shares of PVR Ltd., India’sbiggest theater exhibitor, fell more than 8 percent intraday. -- The Economic Times