Five Implications Of Reliance Jio's Rs 15,000 Crore Rights Issue - What Mukesh Ambani May Be Signalling

What can be the directional changes in the Mukesh Ambani group by issuing Rs 15,000 crore equity shares?

The announcement that Reliance Jio (RJio), the telecom services subsidiary of Mukesh Ambani’s Reliance Industries, will raise Rs 15,000 crore through a rights issue will actually involve very little net additional money inflows into this company. RJio is India’s biggest investment in telecom, and could become one of the country’s biggest players when it launches nationally in 2016-17.

As the nearly-fully owned arm of the flagship company, the rights money will merely flow from one pocket to another, from the parent to a money-guzzling offspring. Most possibly, it will convert existing loans to the subsidiary into equity.

The net effect will be to increase the debt-raising capability of RJio while marginally worsening the debt profile of the former. Reliance Industries may no longer be a zero-net-debt company after this. However, the rights issue signals several possibilities and directional changes in the Mukesh Ambani group.

#1: With RJio being capitalised more strongly with this rights issue, it prepares the stage for a future dilution and initial public offering, thus derisking the mother ship from future investment commitments. Outside investors may be called upon to finance growth.

#2: The Reliance has stayed away from the capital markets for nearly a decade. The RJio move may signal a probable return to the Dhirubhai Ambani model of raising money from the markets to bankroll growth.

The founder made Reliance a financial powerhouse by repeatedly raising money in new Reliance subsidiaries and then merging them back into the mother ship. His son Mukesh may be thinking of reversing the idea, by demerging major businesses into new, listable entities that can raise more money for growth.

#3: If RJio goes well, it could set the stage for future flotations of Reliance Retail or the payments bank for which it has obtained an in-principle licence from the Reserve Bank of India. In 2014, Reliance acquired the Network18 media group, which is already a listed entity.

#4: At some point, the core Reliance Industries will be the company originally Dhirubhai envisaged – an oil and gas producer, refiner and petrochemicals and plastics major. One cannot, however, rule out some demergers (or exits) even in this core business.

In 2014, Reliance was looking to sell some of its shale oil assets in North America. But collapse of oil and gas prices may have killed that idea. In 2014, Mukesh Ambani sold a 49 percent stake in the textile business, including the Vimal brand, to a Chinese company. The textile business was the one that catapulted Dhirubhai into the big league.

#5: Given the complexity of Reliance’s many-businesses-under-one-roof strategy, the company’s valuations may be understated, since it is difficult to value the sum of the parts that are invisible to analysts. The Reliance Jio rights issue and possible future listings will make the company easier to analyse, and some value unlocking becomes possible.

Ambani is probably coming to the conclusion that the sum of Reliance’s parts may be greater than the whole. Analysts may agree.