- Reliance Industries chairman Mukesh Ambani is Asia's second-richest man
- He adds $12.1 billion (around Rs. 77,000 crore) to his wealth this year
- Jio has sucked in more than $31 billion (Rs. 2 lakh crore) in investments
The chairman of Reliance Industries Ltd. has added $12.1 billion (around Rs 77,000 crore) to his wealth this year, according to the Bloomberg Billionaires Index, as shares of his refining-to-telecom company surged to a record. Spurring the rally on is optimism that a new $23 phone (Rs 1,500) launched last month will expand the market for Ambani's fourth-generation mobile network into India's hinterland. The whistles and applause that greeted the JioPhone obscured the fact that by one measure the company's debt has climbed to at least a 15-year high.
Local brokerage Kotak Securities Ltd. sounded a warning on July 23 when it downgraded Reliance's stock to reduce. "We remain wary of high capex run-rate and rising net debt levels," wrote Mumbai-based analysts Tarun Lakhotia and Akshay Bhor.
Ambani described Jio as "a jewel" among Reliance assets during the company's annual general meeting on July 21. "Its business and societal value will grow immensely over the next decade," he said. "Jio will become India's largest provider of data service, products and application platforms."
To be sure, Kotak Securities is among a minority of four brokerages with a sell rating on Reliance, compared with 13 hold and 21 buy recommendations among firms Bloomberg tracks. The company's shares have climbed 49 percent this year to close at Rs 1,615.20 in Mumbai on Monday, compared with a 12-month target of Rs 1,619.20.
IDBI Capital Market Services cut its recommendation to 'accumulate' from 'buy' last month citing the recent share surge, while Macquarie Research re-initiated coverage of Reliance with an 'underperform' call.
Since carrier Reliance Jio Infocomm Ltd. is a new business, it will have to account for "significant" depreciation and amortization charges, which will result in losses till the year ending March 2021, Macquarie Research analyst Aditya Suresh wrote in a July 25 report. Depreciation and amortization allow a company to spread out an asset's cost over its life.
To justify its share price "in addition to the growth from RIL's new refining and petchem projects and a constructive refining margin view, we need to ascribe $12 billion option value for Jio," Suresh wrote. "With not a single dollar of revenue booked we consider this optionality premature."
The 4G JioPhone unveiled last month further fueled the rally. The handset will run on voice commands in 22 Indian languages and the company expects its cheaper rates and high-speed data access to open up a market of about 500 million customers currently using feature phones on second-generation networks.
Investments in refining and petrochemicals may start benefiting Reliance from the current financial year, said Vishal Kulkarni, a Singapore-based analyst at S&P Global Ratings. He expects operating profits from these businesses to grow by 50 percent in the year ending March 2019. Jio may make an operating profit of $1 billion (around Rs 6,400 crore) this fiscal and triple it next year, he said.
Still, Kulkarni expects the telecom business to be at least two years from having a mature, paying subscriber base. "There are strong incumbents, which will give a good fight over subscribers or revenue share," he said. "More than 70-80 percent of the EBITDA will come from refining and petrochemicals."
For much of the past seven years, new ventures such as retail and telecom have weighed on group earnings, along with a challenged energy exploration business. Reliance Retail, which sells everything from clothes to electronics and vegetables, accounts for less than 2 percent of group profit more than a decade after its launch.
Despite healthy additions from refining and petrochemicals, cash reserves have declined 7 percent in the past five years, according to statements on Reliance's website.
Analysts predict better earnings this year on as about $18 billion of investments in expanding petrochemical capacities and the pet coke gasification unit start contributing.
"Our energy and materials businesses constitute a strong platform to generate stable, annuity-like cash flows with a potential to reach EBITDA of Rs 1 trillion (Rs 1 lakh crore) within the next few years," Ambani said on July 21.
Free cash flows, a gauge of a company's financial performance and ability to repay debt, are expected to move back into positive territory in the financial year ending March 2019, according to a July 2 Morgan Stanley report. The measure turned negative in the year ended March 2014 and deteriorated further over the next three years.
Reliance's reported debt numbers may actually increase over the next two to three years due to planned investments of about Rs 55,000 crore in the current fiscal and a "significant payment" due for capital spending and deferred liabilities, according to Kotak Securities.
"We rule out a substantial reduction in effective net debt over next 2-3 years," the analysts wrote, noting the "continued cash burn in Jio."
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