One of the richest group of companies and the provider of largest telecom network (Jio), Reliance Industries Limited on 30th April 2020, announced its rights issue after its time span of 3 decades. Before now it announced it in September 1991. The decision taken by India’s one of the largest conglomerates is to achieve its goal to be a zero debt company at the end of the current financial year. This rights issue by the RIL is the biggest rights issue in India. Although the people who have RIL shares to the record date are eligible for the subscription for the Rights Issue. Still the fund raised by the RIL from the Rights Issue is near to the accumulated amount garnered by the 13 companies in the whole financial year 2020.
RIL announced 1:15 Rights Issue, that means for every 15 shares the equity holder can buy 1 Rights Issue at the discount of 14% of the closing price. So, the total discount an investor could gain on the 16 shares is approx 1%. That means the company would issue 15 shares at the closing price and 1 right issue share at the discount of 14%, if we calculate on the basis of closing price of 30.04.2020 Rs.1,466 per share so for 15 shares it would cost Rs.21,990 and 1 share at the discount of 14% at Rs.1,257 that gives a total of 23,247 for 16 shares that means Rs.1,453 approx for a share which provides overall discount of approx 1% for one share. As there were 6,339,203,530 shares before the Rights Issues, 50.03% of them were of Promoter and 49.97% are of Public. The new shares issued by the RIL are about 450,000,000 as it issues 206,538,998 to promoters and 206,281,853 to the public expanding its equity base to 6,752,024,381 which gives 6% equity dilution. This makes the RIL to raise approx Rs.53,125 crore through rights issue.
The conglomerate has to take this decision to achieve its target of becoming a zero debt company. The Chairman Mukesh Ambani set out the roadmap about 8 months back for RIL to become Debt Free by 2021 that means ongoing financial year. RIL had earlier planned to sell the stake in its refinery business to Saudi Arabian Oil Co with the major aim of reducing the debt but the due to Covid crisis and the crash in crude prices that doesn’t seem to be possible and gone on hold.
But in the initial days of this week the deal of Facebook Inc. about it investing Rs. 43,600 crore for the 10% stake in the Jio Platform Ltd. brought a hope in the mind of RIL in achieving its target debt free. RIL net debt was Rs.161,035 crore as of March 2020. With the facebook deal it landed up to Rs. 117,435 crore and after the Rights Issue it gets down to Rs. 64,310 crore. After deducting the investment from BP in its retail business for Rs 7,000 crore, which further brings it down to 56000 crore approx. Net profit in January-March slipped 37 per cent to Rs 6,546 crore, the lowest in three years, as a rise in consumer-facing business was not enough to shield the firm from fall in the petrochemical business and inventory losses resulting from decline in global oil prices and coronavirus lockdown leading to demand destruction
Bottom line of RIL took a hit due to an exceptional loss of Rs 4,267 crore during the quarter. For the financial year 2019-20 ended on March 31,RIL’s net profit declined marginally to Rs 39,354 crore (0.59 per cent YoY). Net profit margin was Rs 39,588 crore last year. On revenue terms, revenue (consolidated) of the company witnessed decline of 2.50 per cent YoY to Rs 1.51 lakh crore.
In addition to this RIL is also getting further ahead with the deadline of getting debt free from March’21 to December’20 that is the end of the ongoing calendar year. RIL is expected to raise Rs.1.04 trillion by June 2020, by this the RIL will have just left with Rs. 56000 crore approx to meet the net debt target at the current level. RIL announced it was looking to sell 20 per cent in its oil-to-chemicals (O2C) division to Saudi Aramco for around $15 billion. The two companies are yet to sign a definite agreement, leaving scope for changes in valuation, analysts opine. Although the things are not clear yet but if the things go right the company would be debt free by Dcember’2020.
This can be a great opportunity for the investors as the rights issue strengthens the capital structure of the company and reaffirms promoter commitment to the business. Many brokerage firms like Angel Brookings have applauded the decision for the growth of the industry and also sees a forthcoming opportunity for the investors as the telecom sector is expected to grow at a higher rate in the future. With the launch of Jio meet in the coming days would also prove to be market expansion as well as high rate revenues for the RIL. Therefore it’s the peak time for any investor to make the right choice and invest in something that will give them the benefit. Also this is the best example for the students for the stock markets and finance to study as the live case study.
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