In August 2019 when Mukesh Ambani had first announced plans to become a zero-net debt company by 2021, most analysts thought it was impossible. After all, Reliance had taken a mountain of debt to finance its telecom and digital foray. There appeared to be no way for RIL to monetize assets in such a short time and become debt-free. But a lot has progressed since then.
Reliance’s debt dilemma
Not many may be aware, but Reliance was a zero-net debt company till 2012. We are referring to net debt and not to gross debt. As of March 2020, RIL has a gross debt of Rs.3.30 trillion and cash reserves of Rs.1.70 trillion leaving the company with net debt of Rs.1.60 trillion. This is the figure that RIL is looking to address by March 2021. But, how did this massive debt mountain come about if RIL was zero-net debt as late as 2012? There have been two factors that drove this debt binge. The first trigger, of course, was the Reliance Jio foray. The company used a mix of refining/petchem profits and long term borrowings in the market. Secondly, RIL also invested heavily in upgrading its refining and petchem capacities. In all, RIL had invested Rs.550,000 crore since 2014 and this was substantially funded by debt. However, now RIL does realize that to sustain valuations in the future, it needs to focus on a more flexible balance sheet. Otherwise, financial risk may become too much for RIL.