Express news service
CHENNAI: Mukesh Ambani’s Reliance Industries Ltd (RIL) has made much of its brand new net zero debt status over the past year.
Having raised a record Rs 2.6 crore of capital in just under 200 days through share sales and rights issues, the company did not just report zero net debt in its annual report for fiscal year 2020-21 (FY21) – she declared negative net debt.
In other words, he says as of March 31, 2021, he had more than enough liquid assets to cover all of his debt.
But scratch the paint a bit and things aren’t what they seem.
On the one hand, estimates of RIL’s effective consolidated net debt by various brokerage firms disagree with those of the company. At a hefty Rs 64,000 crore-Rs 99,000 crore, those estimates aren’t small either – and a far cry from RIL’s stated position.
Calculation of net debt
To understand why such discrepancies exist between the company’s annual report and brokerage house estimates, we need to understand what net debt is.
Basically, this is a measure of liquidity and answers a simple question about financial health: If every creditor in a business someday demanded immediate repayment of all loans, would they have enough cash to support them? pay them all?
Net debt is usually calculated by deducting liquid assets such as cash and readily tradable securities from total debt (or gross debt). While cash is the most liquid asset, marketable securities can be easily converted into cash and are typically traded in recognized financial markets, such as listed stocks and government securities.
The disagreements with RIL’s reported net debt position are due to many factors, but the company’s “rather questionable” definition of marketable securities is major, a stock analyst said on condition of anonymity.
Not so marketable
Based on its FY21 annual report, RIL arrives at its consolidated net debt by deducting cash and investment securities (CMS) from gross debt.
Aided by record capital raised last year, the company said a sharp drop in gross and net debt – from Rs 3.36 lakh crore and Rs 1.61 lakh crore respectively at the end of fiscal year 20 to Rs 2.51 lakh crore and a negative Rs 2,208 crore as of March 31, 2021.
But in the case of net debt, this deleveraging is driven almost entirely by the marketable securities component, which rose from Rs 1.75 lakh crore in fiscal year 20 to Rs 2.54 lakh crore.
Cash and the like, on the other hand, went from Rs 30,920 crore to Rs 17,397 crore.
The footnotes indicate that these marketable securities include the current investments of Rs 1.52 lakh crore made by the company and “other marketable securities” valued at an additional Rs 44,333 crore.
But more than two-thirds of these current investments (Rs 1.15 lakh crore) are in unlisted mutual funds.
Unlisted securities are so called because they are not traded in recognized financial markets and, therefore, may not very easily be converted into cash.
Other marketable securities include RIL’s investments in two unlisted associated companies: Jio Digital Fiber (JDFPL) and Summit Digital Infra (SDIPL).
The company holds non-convertible bonds (debt instruments) valued at Rs 37,222 crore and preferred shares valued at Rs 77,984 crore in JDFPL and SDIPL, but it is not clear which ones ‘among them are included among other negotiable instruments.
Inclusions and exclusions
Another element of the CMS component is considered a questionable inclusion: the call money to be received from last year’s rights issue.
Call money is a type of loan that must be repaid when the lender requests it.
Investors who received shares in the rights issue must pay RIL Rs 53,124 crore in total, but only 25 percent (Rs 13,281 crore) had to be prepaid in FY 21.
The remainder of the Rs 39,843 crore call money, for which RIL has already made two calls, is to be paid in two installments this year. But RIL included these receivables in the CMS component for FY21.
“This,” CLSA notes, “helped it turn into net cash.”
These are not just inclusions, however, and a major exclusion on the debt side also contributes to the divergence in net debt estimates.
RIL is due to pay the government around Rs 37,000 crore for new purchases of spectrum, but CLSA says that since this spectrum was not allocated until March 2021, “the unpaid spectrum has not yet been counted”.
“Adjusted for rights issue money, unpaid spectrum …, as well as our estimate of investment creditors, the consolidated net liability was $ 12 billion (approximately Rs 87,500 crore)” , he added.
These estimates vary among brokerage firms. Jefferies sets RIL’s adjusted net debt at year end 21 at Rs 64,164 crore.
Kotak Institutional Securities estimates the effective net debt at Rs 59,400 crore, but only if the money receivable from the rights issue is taken into account.
Excluding that, this figure rises to Rs 99,200 crore.
But Kotak analysts also note that the company used new capital and cash profits to reduce effective net debt (including investment creditors) by Rs 1.89 lakh crore; reduce working capital by Rs 50,700 crore; reduce other debts by Rs 20,100 crore; and fund Rs 79,700 crore in capital expenditure.
All in all, RIL has managed to massively reduce its level of debt. But has it really turned into a zero net debt business?
The answer, based on third-party estimates, is: not really. Or, at least, not yet.