Can FB's $5.7b help ease RIL's debt worries amid Aramco holdup?

NEW DELHI: Facebook’s $5.7 billion investment in Reliance Jio sent Reliance Industries’ shares soaring 8 per cent in morning trade on Wednesday, making stock investors richer by Rs 58,000 crore on a day when global markets traded deep in the red.

The Jio deal materialized at a crucial time for Reliance Industries (RIL), as its much-anticipated Aramco deal has come under a cloud following the oil price crash in last two months. That had already cast doubts over the RIL’s ability to deliver on its pledge to reduce debt at the company level this financial year.

The oil-to-telecom business conglomerate is promoted by Indian billionaire Mukesh Ambani, ranked Asia's richest person in July 2018 and the world’s 18th wealthiest in January 2018.

Concerns over high debt levels have caused the RIL stock to lose value in recent times, and even after some recovery over the past few days and Wednesday’s solid bounce, the stock still trades some 14 per cent lower on a year-to-date basis.

Analysts have time and again argued that asset monetisation and debt reduction will be a key catalysts for the stock in the near future.

At the end of December quarter, RIL had gross debt of Rs 3,06,900 crore and cash and cash equivalents of Rs 1,53,700 crore. The company invested nearly $50 billion, or roughly 50 per cent of its market-cap in the telecom venture. Facebook’s investment valued Jio Platforms at Rs 4.62 lakh crore pre-money enterprise value ($65.95 billion, assuming a conversion rate of Rs 70 to a US dollar).

Aamar Deo Singh, Head Advisory at Angel Broking said: “The deal is a win-win situation for both the partners, as on one hand, it gives Facebook a wider audience with Jio’s 388 million client, it helps Reliance pay its debt as well as leverage the reach of Whatsapp, Facebook Chat’s service. And with the current global scenario post Covid 19, focus being on digital, it opens up huge business opportunities for both of the giants. It couldn’t have come at a more opportune time."

Credit Suisse said Facebook investment will accelerate Jio's digital monetisation drive. It noted that the deal followed the restructuring announced in October 2019, wherein Reliance transferred Rs 1.08 lakh crore of debt from Jio to the standalone entity.

Jefferies said the transaction suggests Facebook expects Jio’s Ebitda to double from current levels. The transaction, it said, sets a benchmark valuation for any future listing for Jio.

RIL said with the deal, JioMart and Whatsapp will empower 3 crore small shop owners in the country. The Facebook deal turned out to be the largest FDI in the technology sector in India and largest investment by a technology company for a minority stake anywhere in the world.

Dolat Capital said that the collaboration with Facebook will give Jio a significant advantage on product and technological front to keep competitors miles away and grab a larger wallet share of consumers across domains viz. telecom, payments and retail etc. Besides this Jio has made investments in more than 10+ start-ups and also tied-up with Microsoft for cloud services, it said.

"With India slated to have 900 million internet users in a few years, as per a CISCO report, limitless potential opens up. Reliance stock is already up almost 7 per cent, clearly indicating that markets have given a thumbs up to this business decision, as it paves the eventual listing of Jio which is in the process to transform itself into a digital services company,” Singh said.

The investment valued Jio Platforms among the top 5 listed companies in India by market capitalisation, within just three and a half years of launch of commercial services.

The main focus of the deal is to come up with digital-based solutions for 60 million micro, small and medium businesses, 120 million farmers, 30 million small merchants and millions of small and medium enterprises in the informal sector. Reliance Jio, RIL's telecom unit with 388 million subscribers, will continue to remain a wholly owned subsidiary of Reliance Platform.

Earlier, Reliance had announced a partnership with BP valued at $1 billion for the fuel retail business. Besides, the company has entered into a binding agreement with Canadian asset management company Brookfield Infrastructure Partners for an investment of Rs 25,215 crore ($3.55 billion) in the telecom tower assets.

HDFC Institutional Equities last week said it still expects the Aramco deal to go through because of the strategic importance for both parties.

They have a non-binding letter of intent (LOI) for Aramco to buy a 20 per cent stake in RIL’s oil-to-chemicals (O2C) business, which is valued at an EV of $75 billion. Given a collapse in oil prices globally, the deal could be on the backburner for now.