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RIL’s capex worries brokerages looking for cash flow growth

The company is investing more than its cash profits — resulting in debt build up.

, ET Bureau|
Aug 08, 2019, 07.53 AM IST
The average interest rate rose to 9.1 per cent in FY19 from 3.5 per cent in FY14.
ET Intelligence Group: In April, brokerage Credit Suisse put a price target of Rs 1,425 along with ‘outperform rating’ on shares of Reliance Industries (RIL), India’s largest company by profits. This week, the brokerage (and the same set of analysts) downgraded the stock — revising its rating to ‘underperform’ and lowering the 12-month price target to Rs 995.

What has changed in five monthsRs Higher liabilities, lower multiple for refining and lower average revenue per user in the telecom venture (Jio), according to the Indian arm of the Swiss brokerage. Though none of these reasons come as a revelation to investors — and were probably well known even in April — the market felt the jitters with a leading brokerage slashing the target price by nearly a third in a short period.

RIL has been undergoing the largest capital expenditure exercise by an Indian corporate, which has increased debt significantly and doubled interest outgo in last one year. The company has invested nearly $93 billion (Rs 6 lakh crore) in different verticals in the past six years. Of this, nearly half is invested in the telecom venture.

In the last fiscal, the company invested Rs 1.3 lakh crore in capital expenditure, the highest ever in the past six years. Due to this, gross borrowing and financial liabilities of the company rose to Rs 3.9 lakh crore in FY19 from Rs 1.5 lakh crore in FY14, according to Kotak Institutional equities (KIE). In fact, liabilities would have shot to Rs 4.6 lakh crore had RIL not demerged its telecom fibre and tower assets into an infrastructure investment trust (InVITs).

The company is investing more than its cash profits — resulting in debt build up. The gap between operating cash flow and cash capex is Rs 69,700 crore — the highest in five years. Consequently, the operating profit before depreciation and amortisation (Ebitda) as a percentage of operating cash flow — a measure of liquidity — fell to 27 per cent in FY19 against 69-84 per cent between FY16 and FY18, according to KIE.

RIL’s interest outgo is rising at a faster pace than debts — thanks to higher interest rate (due to increasing percentage of rupee debt) and interest paid on account of capex credit. The interest outgo capitalised reached Rs 26,700 crore in FY19 compared with Rs 17,330 crore in FY18, said KIE.

The average interest rate rose to 9.1 per cent in FY19 from 3.5 per cent in FY14. The share of rupee debt rose to 44 per cent, a multi-year high. The yield difference between cash yield and cost of debt reduced to just 60 basis points in FY19, according to CLSA.

According to Credit Suisse calculation, the total liability of RIL reached $65 billion in FY19 compared with $19 billion in FY15. Liabilities include crude payable, customer advances, Jio Phone finance, capex creditors and customer advances. RIL has crude payable as high as 121 days, nearly 2-4 times higher than peers and customer advances amount to 10 per cent of sales.

Investors are anxious to know whether RIL’s capex has peaked out after six years of continued investment and if free cash flow would grow. This will be a crucial trigger for the stock, at least in the near term. With several projects yet to reach full commissioning stage, nearly one-fourth of its consolidated balance sheet is in the form of ‘capital work in progress’, depressing return ratios.

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