Reliance Industries’ Rs1.3 trillion non-core spending seen diluting return on capital

Mumbai: Reliance Industries Ltd (RIL) has committed Rs 1.3 trillion worth of investments across five states in its non-energy businesses over the past two months. Though analysts worry that these investments may dilute its return on capital employed, RIL executives say it underlines the seriousness with which the company is pursuing opportunities in telecom and retail.

“The consumer-facing segment is important to RIL and these investments show how serious we are about it. It’s a huge opportunity for us,” a Reliance executive said on condition of anonymity. RIL did not respond to an email sent on 27 February.

Since January this year, RIL has announced investments in Maharashtra (Rs60,000 crore); Andhra Pradesh (Rs52,000 crore); Uttar Pradesh (Rs10,000 crore); West Bengal (Rs 5,000 crore) and Assam (Rs 2,500 crore). Most of these investments would go into telecom (Reliance Jio Infocomm Ltd); Reliance Retail and energy, in that order.

“RIL has invested about $53 billion in a range of businesses from wireless telecommunications and shale reserves in the US to real estate and retail outlets. These investments made over the past decade have lowered the return on capital to just 6.4% in the year ended March 31, 2017. Its Jio telecom venture alone has sucked up more than $38 billion,” said Somshankar Sinha, Piyush Nahar and Pratik Chaudhuri of Jefferies India in a report dated 27 February.

The analysts expect return on capital to rise but stay in single digits till FY24, “but even this may prove optimistic if Reliance starts spending again,” they said.

So far, RIL has invested $38.6 billion in telecom; $9.2 billion in shale gas business and a total of $6.5 billion in retail, media, real estate and others.

“The investment commitments which RIL announced across five states are indicative and conceptual and may not reflect in actual capital expenditure. Ultimately, that would depend on a thorough appraisal of individual projects. In general, though, Reliance has always looked for new avenues to invest and it is plausible that capital spend remains elevated - although not at the level seen in FY15-18,” said an analyst with a foreign brokerage on the condition of anonymity as he is not allowed to speak to reporters.

RIL’s investments in Assam, West Bengal and Uttar Pradesh will be to strengthen Jio’s network and infrastructure in the states; strengthening its optical fibre network; setting up of an electronics manufacturing facility for mobile phones, set-top boxes and television sets and expanding its retail network including fuel retailing.

However, analysts expect RIL to be generating impressive cash flow from next fiscal to finance these investments.

“RIL has always had access to funds at above sovereign rating for its investment requirements; we do not see that changing for the near term. Also, the company is expected to generate Rs 2 trillion of cash profits over FY18-20 (estimated), we have seen that RIL prefers to balance its funding with lower cost of debt than equity which is at much higher cost for it versus debt cost, given its superior credit rating,” said Probal Sen, an analyst at IDFC Securities.

Sen added that for a company of RIL’s size, its debt to equity ratio at 0.7-0.8 time over FY18-20e, remains very comfortable.

RIL had this January said that its capex cycle for the energy business is over and full benefits of the same would accrue to the company from financial year 2019.

In 2014, RIL embarked on a $16 billion refining and petrochemicals expansion plan which ended this January with the commissioning of its refinery off-gas cracker complex of 1.5 million tonnes per annum capacity along with downstream plants and utilities.

In addition to the investments announced in the five states, RIL last month also bought a 65% stake in a real estate project in Bandra-Kurla Complex in central Mumbai for Rs 1,105 crore, taking its total investment in property to $2.6 billion. The company also bought a 5% stake in content producer Eros International Plc for $15 per share.

On Monday, RIL shares fell 2.48% to Rs924.20 on BSE, while the benchmark Sensex shed 0.88% to 33,746.78 points.