Remarkable feat for Reliance Jio with the eleventh cheque and with that managing to completely get rid of debt from their balance sheet?
This is significantly commendable and it has not been done in desperation when the stock price had fallen to Rs 850. It has been done from a position of strength and after demonstrating their significant capabilities across businesses; not only in Jio but also on the retail side with the tie up with Facebook and even their refining and petrochemical business which during the lockdown demonstrated that they have managed to run their facilities at very optimal levels. In fact the fourth quarter results also demonstrate that their GRMs have been very healthy.
What is commendable is that they have done it from the position of strength and as a result of this, the balance sheet has strengthened even further. And the feedback form international and domestic investors is that there are very few companies today which have markedly relatively safe investments from the perspective of a strong balance sheet but also have got meaningful growth opportunities. So the way this whole company has been manoeuvred not just again from the capital raising perspective but over the last several years is really things coming to a fruition of efforts of several years; not just the management of these teams including Jio, refining and retail but across the board.
There is heightened buzz that they are looking at a stake buy or a whole buy when it comes to the Future Group. As a group, they are strategically trying to strengthen each and every vertical of the company?
I have also read in the media as much as you have. The strength in the retail business is not just client reach but essentially their entire vertical and horizontal integration; right from logistics to warehousing to the entire chain. India as you know is a very fragmented market and to that effect it was very essential that part of your chain is very strong; not just your end-consumer reach. One would have often heard that the markups in pricing food items is 10 fold by the time it reaches consumers.
Now Reliance every quarter sets up the number of retail chains, the outlets, etc and it is more than most other companies in the industry. It is the total of most of the companies put together. While they have been building out the back-end of the chain given the length and breadth of the country because you have really targeted so far the organised market which is little more than $100 billion, there is a trillion dollar unorganised market sitting there. So looking at Future Group would be a part of their strategy to augment their existing capabilities.
I think what they would be scrutinising very closely is clearly two things: how significant are the synergies and at what valuations that they can potentially acquire this. I am not saying that we are acquiring or not. I do not know if they are acquiring or not but it will be interesting to watch out.
Where does it leave the shareholders? The stock is already at Rs 1,670 per share. Is there still an opportunity to buy or do you really have to wait for that dip to come in?
We do have a buy on the stock. I am not a good trader but we do have a fundamental buy on the stock.
How much importance should we pay to the fact that Reliance has now become a net cash company. At a time when interest rates are low, raising capital is easy. Do you think markets are unlikely to get too excited about Reliance becoming a net-debt free company?
Your mind just goes back to basic economic fundamentals. I personally do not believe debt free companies’ cost of capital is optimal because there is a tax break rebate. Economic theories suggest that there is a certain optimal amount of debt all companies should have. So my thought is that being completely debt free is also not good. Having said that, although Reliance’s net debt is about Rs 1,61,000 crore and while we estimate that it is more in the region of about Rs 2,50,000 crore, our thought is that there would still be some debt left over and in fact my thought is that a bit of debt is a good thing.
Also, in my opinion Reliance has built this cash as a war chest for further growth in the form of potential acquisitions. Organic growth would still require some capital and for the moment, Reliance’s capex has fallen from Rs 1 lakh crore to Rs 76,000 crore in the last year. We estimate it may fall further again this year to Rs 46,000 crores that you could see in the form of acquisition especially this number picking up. So we will wait and watch.
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