With the Competition Commission of India (CCI) clearing the Facebook investment of $5.7 billion (Rs 43,574 crore) in Jio Platforms earlier this week, Mukesh Ambani has more than kept his promise of making his flagship company, Reliance Industries Ltd (RIL), debt-free (in net terms) well before the deadline of 31 March 2021.
The green signal to Facebook implies that the remaining minority investors in the Jio Platforms, who have collectively committed another investment of Rs 72,000-and-odd crore for small slices of equity, will also be waved through. You don’t clear a 9.9 per cent stake by an 800-pound gorilla like Facebook just to hold the relative minnows back.
The other investors include Vista Equity Partners, KKR and Public Investment Fund (2.32 per cent each), Silver Lake (2.08 per cent), Mubadala (1.85 per cent), General Atlantic (1.34 per cent), Abu Dhabi Investment Authority (1.16 per cent), TPG (0.93 per cent) and L Catterton (0.39 per cent). The 10 investors, including Facebook, which gets a board seat, hold just under 25 per cent of Jio Platforms’ equity. RIL holds the rest.
The sale, combined with the Rs 53,000-and-odd crore raised by the parent company Reliance Industries by way of a rights issue that closed in the first week of June with a massive over-subscription, helped raise the total funds infusion to just under Rs 1.69 lakh crore. This is well above the company’s net debt level of Rs 1.61 lakh crore as at the end of March 2020. Net debt is total debt minus cash and cash equivalents.
This massive fund-raise, unprecedented in Indian equity or debt history and completed in less than three months from announcement to execution, tells us a lot about how the Ambanis operate their 3S strategy – size, scale and speed.
In just over three years, Jio has become the country’s largest player in telecom in terms of both volumes and value, his company raised massive amounts of debt that effectively made RIL a too-big-to-fail entity, and equally rapidly Ambani dissolved the debt in double-quick time. During the same time, Reliance Retail has become the country’s biggest offline retailer. Ambani does not play for small stakes.
Millions of words have been written about the factors responsible for the Ambani story that began with Dhirubhai, but the key elements of the playbook have always remained the same: raising debt at the right time, raising equity at an even better time, executing projects with a compressed timeframe at lowest costs, and – most important – run a sophisticated finance machine that undergirds all these ambitions.
RIL is actually two kinds of companies rolled into one. At the front end is the actual company – and its various operational subsidiaries – that manufacture or sell products and services.
But at the back end there is a huge financial juggernaut that operates almost independently of the main consumer-facing businesses. This machine is constantly raising and repaying money through debt or equity or both.
It is constantly scouring India and the world for cheaper and cheaper sources of finance, regardless of whether the company needs money now or later.
Many companies, having achieved zero-debt status, will probably bask in the achievement and sit back to relax, but RIL’s financial machine will be whirring in frenetic activity even now. It will be looking for retiring costlier debts by raising cheaper money, or it will be seeking more equity at higher and higher valuations for its other companies (Reliance Retail, for example).
This way, no matter how huge the debt at any point of time, it will never look dangerously overleveraged at any point of time.
Put simply, the main explanation for RIL’s success is its astute financing acumen and smart cash-flow planning, which actually tends to make it the lowest cost producer among Indian and global players who tend to borrow at higher costs and end up diluting equity at the wrong time.
In three words, debt, equity, cash-flow – and tax planning to serve as the icing on the cake.
The reason why Ambani raises lots of debt is because interest costs provide a tax shield, being a deductible item of expenditure. Debt raised before a project is formally commissioned can also be capitalised, which means the total capital cost is inflated and provides depreciation benefits at a later stage. Since depreciation is merely a notional cost, it allows RIL to pay lower taxes even as it improves cash flows for the company.
High cash flows make the company perennially attractive for lenders (who then offer the lowest possible rates) while also allowing Ambani to extract lower prices from suppliers since he can pay cash on the dot, if required.
But the sheer size of Ambani’s requirements make most suppliers offer their best prices and longest payment plans, which implies that in some product groups he may even have negative working capital cycle. That is, he gets credit lines from suppliers that are longer than the average credit period he gives his distributors and customers.
Another element of the Ambani financing wizardry relates to low or minimal hedging costs for liabilities or payments due in foreign exchange. Ambani is both a huge importer (main crude and raw materials) and a huge exporter (of petro-goods and petrochemicals).
This means he does not need to pay bankers a prince’s ransom for hedging his foreign exchange exposures. He can pay for them from export earnings in dollars.
The related advantage of being such a huge operator in the foreign exchange market is that he can take speculative calls on the direction of the rupee and make money on that side too.
The lessons for India Inc, assuming they do not already know it, are the following.
Don’t over-leverage; if you are raising lots of debt, be equally ready to repay it whether through additional equity or other means. If you don’t have the future cash flows for servicing debt even in tough times, don’t depend on debt.
Better to dilute equity early and load up less on debt. Ambani could raise massive amounts of loans for investment in the Jio and Reliance Retail expansion plans because he had a cash cow in the refining and petrochemicals businesses.
Both debt and equity are necessary for good cash flows and tax efficiency, but the real expertise is in the timing – knowing when you should raise debt and from where, when to retire it; when you should raise equity (obviously when market premiums can be high), and when you should stay away (when investors are risk-averse).
Over the last six years, when the rest of India Inc was deleveraging, Ambani was raising huge amounts of debt, and now, even after a Covid-induced recession and skittish markets, he has managed to raise humongous amounts of equity from both big investors and retail ones.
Don’t get emotionally involved in your businesses, even if your dad built them. For purely sentimental reasons, Mukesh Ambani could have kept the Vimal brand of textiles; but he sold out at the right time. For purely emotional reasons, he could retain RIL as a refining and petrochemicals company, but he has plans to sell a part of his company to Saudi Aramco. He would, if needed, exit the business if other opportunities look better.
A question that remains is this: why does RIL not become an actual zero-debt company and not merely a net zero-debt company, which means he holds huge cash investments that may be earning sub-optimally?
The answer is: cash is king. If you have liquid resources that you can encash anytime, you can buy into the right opportunity at the right time and the right price. And, of course, this huge investment in cash provide just the kind of comfort that lenders like.
You cannot understand Mukesh Ambani’s successes without understanding the financing machine his father invented and which he has now mastered.
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