Why churning out money, both debt and equity, is RIL’s core business

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What exactly is the core business of Reliance Industries Limited (RIL)? Based on announcements made at the annual general meeting yesterday (August 29), it appears that it currently has four main business sectors: O2C (from oil to chemicals), telecommunications and digital ( Jio), retail and renewable or green energy.

Investments amounting to more than Rs 3.5 lakh crore – Rs 2 lakh crore in telecom and 5G services, Rs 75,000 crore each in new energy and O2Cand unnamed sums to enable upstream integration into FMCG (fast moving consumer goods) to fuel its retail branches add up to huge investable sums.

The numbers tell the real story of what RIL really is: at its core, it is a giant wholesale finance and capital allocation company.

In fact, we can say that financing is its core business. Without it, none of the businesses in operation would be as large or as profitable.

A single number will tell you why RIL is more about borrowing, generating, repaying and deploying money than any other skill.

In March 2020, after raising capital from investors like Facebook, Intel, Google and other long-term investors (including its own shareholders), RIL became a zero net debt company, although some analysts believe the numbers have been massaged to achieve this status.

But, ignoring this quibble, in June 2022 (i.e. the first quarter of FY23), its debt was again increasing significantly. Against raw unpaid debt of Rs 263,382 crore ($33.4 billion) as of June 30, 2022, its net cash and cash equivalents were 205,727 crore rupees ($26.1 billion).

It is a debt of over Rs 57,000 crore just two years after becoming net zero debt. One can rest assured that with the additional investments of Rs 3.5 lakh crore planned in O2C, 5G, FMCG and New Energy, this debt bundle will swell again.

This gives us a clue as to what RIL’s core business is: raising funds well in advance of need and then constantly refinancing, repaying and repaying debt at regular intervals based on cash injections. own funds, internal cash generation and floating public offerings to induct new shareholders. .

This financial comfort contributes to strengthening the other basic skills of the company:

First, having cash means that project builders and RIL suppliers can be pressured to get the best prices, which both makes the projects themselves cost-competitive and guarantees deliveries ahead of schedule. RIL’s famous project execution capabilities are based on this massive financing capability.

Secondthe ability to pay top dollar for top talent – RIL almost overpays its senior executives in exchange for absolute loyalty and commitment – means the group always gets the best value for money in terms of execution capabilities .

Those used to working in multinational groups may not like this addition of family loyalty to work responsibilities, but they can’t argue with someone talking money.

Third, this financing capacity means that RIL can easily transform itself into an operating company and allocator of capital to its subsidiaries.

This means that Mukesh Ambani’s transition to his three children, Akash, Isha and Anant, who will lead Jio, Reliance Retail and new energy companies respectively, will be smoother than under Dhirubhai Ambani who made the fatal mistake of not separating his affairs between his two sons.

Mukesh will clearly oversee the expansion of the business at RIL level, but his two sons and daughter will be challenged to provide the return on equity that RIL will demand.

Fourthfunding capacity means that debt and equity will be in a constant state of flux, with expansions being financed in part by debt and successful expansions allowing for equity expansions, either through public listings or investments private.

Planned massive investments in 5G deployments, retail, O2C and new energy will drive RIL to list its subsidiaries in the next five years as they become substantially profitable on their own.

Jio and Retail are already massively cash positive and profitable. Thus, the debt raised in their name will be amortized by expanding the equity base.

RIL succeeds because it understands money – and how to turn it for profit.

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