Why Reliance Industries is Striving to Become Debt-Free in 18 Months

Relying on aggressive reforms and leveraging strategic partnerships, Reliance Industries Limited (RIL) is making a concerted effort to achieve a debt-free status within 18 months. This ambitious initiative gained further traction in July when BP plc acquired a 49% stake in RIL's fuel retailing business for INR 17,629 crore. However, the company's strategy to achieve this goal has been met with scrutiny, particularly regarding the liberal definition of net debt they have adopted.

The Current Debt Landscape of RIL

As of the end of the 2020 fiscal year, Reliance Industries reported a gross debt of over Rs 3 lakh crore and a net debt of Rs 1.5 lakh crore. In the 2019-2020 fiscal year, RIL incurred an interest expense of Rs 12105 crore, excluding principal payments. By becoming debt-free as per the 2019-2020 figures, RIL stands to save a significant amount annually, which can be reallocated to boost return on investment (ROI) and operational efficiency.

Understanding the Debt Burden

Businesses often fall prey to debt not because of a failure in technology innovation or changing market dynamics, but due to a mismanagement of financial resources. Here is a breakdown of how businesses like Reliance can find themselves trapped in a debt spiral:

Establishing the Company: After years of hard work, your company starts generating positive results. Aggressive Expansion: To fuel growth, loans and borrowings are sought, leading to a mountain of debt. Optimism and Overconfidence: Despite unfavorable economic conditions, the business continues to borrow, driven by optimism. Decline and Debt: When the business cannot meet its expectations, it becomes mired in debt, leading to a downward spiral. Failure: A prime example of this is Anil Ambani's failure due to excessive debt.

Mukesh Ambani's strategic approach has shifted:

Reinvestment: Recognizing the throngs of debt, Mukesh has initiated a strategy to offload it by raising capital through equity sales. Economical Solution: By issuing rights issues and selling stakes, RIL acquires significant funds with no interest burden, albeit at the cost of slightly higher dividend payments. Continuity: RIL retains the flexibility to borrow in the future, reiterating that they are not committed to becoming permanently debt-free.

Attractive Investments in RIL

One can question why all businesses do not follow RIL's path of selling stakes and generating funds. However, the key lies in the attractiveness of the investment offer:

New investors must find the offer compelling. Many companies struggle with appealing valuations or business propositions, deterring potential investors.

Moreover, Reliance's strategic move into the retail market is a significant factor in attracting investors. The recent partnership with WhatsApp and reliance Jio signals a potential revolution in the retail sector, providing a substantial allure to stakeholders.

The bp acquisition of 49% stake in RIL's fuel retailing business is just the beginning of a larger strategy to enhance its retail operations. This move not only provides RIL with the necessary capital but also integrates state-of-the-art technologies, potentially transforming the retail landscape in India.