Cash is king and RIL has loads of it

THE LATEST TRUCE INITIATIVE MAY GIVE A LEG-UP TO CASH-RICH RELIANCE

THE scrapping of the non-compete agreement between the Ambani brothers could well mark an inflexion point for the two groups that have been engaged in a bitter battle for some time.
The truce may be favourable to the country’s most profitable company, the Mukesh Ambani led-Reliance Industries, which has formidable investible resources, than Anil Ambani’s ADA Group, which is already working on several longterm projects. This is because the ADAG’s portfolio includes several businesses that can be attractive for RIL to enter — particularly financial services and infrastructure — but the same may not be true for ADAG. For, RIL’s businesses of petroleum and petrochemicals are highly capital intensive.
RIL ended FY10 with close to $5 billion of cash on its books and debt aggregating to $13.5 billion on a standalone basis. Yet, its debt-to-equity ratio was less than 0.5. Add to this, its subsidiary, which holds RIL shares as treasury stock, had raised over $2 billion from part sale of such stock while the remaining treasury shares are valued at over $2.6 billion.
RIL’s businesses have emerged as a huge cash generating machine, substantially in excess of its existing capex plans. During FY10 alone, the company had earned $6.2 billion in cash profit, while its net capex towards projects during the year was just $2.1 billion. According to Goldman Sachs, RIL is set to generate around $25 billion of excess cash over and above its committed capex in four years from FY11 to FY14. If not reinvested, these cashflows could make RIL debtfree by FY13.
RIL, which has been attempting acquisitions in the petroleum business globally, may now look at targets in the local market. The company may find it more lucrative to acquire an existing company in the new frontier areas it wants to enter than to build from scratch.
On the other hand, the main benefit to ADAG from the scrapping is the removal of ‘right of first refusal’, which had stalled RCOM’s merger with South Africa’s MTN in 2008. However, considering the changed outlook in the telecom industry over the past couple of years marked by a bruising tariff war, the prospects of such a deal taking place in the near term appears bleak.
RCOM has much more debt today on its books than in 2008, which will now go up further with investment in 3G licences. RCOM’s net debt stood at Rs 19,889 crore at the end of March 2010 almost double that of Rs 9,974 crore in March 2008. Also, after the Bharti-Zain deal, the market is no longer enthused about such crossborder deals.
The development is unlikely to have an im pact on the ongoing RIL-RNRL gas supply negotiations, which will happen in accordance with the Supreme Court order.
Although the deal clears the way for both groups to chart out their independent paths in their chosen lines of businesses, there is little likelihood that they will join hands. For RIL, which can choose to enter financial services, telecom or infrastructure businesses, the options are many. However, given the stiff competition, it is unclear as to the value that the company can create for its shareholders by foraying into the new businesses. For ADAG, it may well be business as usual, unless it can pull off an ambitious M&A deal. RIL investors may look forward to further value addition as and when the company decides to enter new businesses.