After seven years the start of a deleveraging cycle at Reliance Industries (RIL) record capital expenditure should ease investor worries of subpar return ratios at the telecom hand of the company.
RIL has demerged the tower and fiber businesses of Jio in favor of a special purpose vehicle (SPV) at the end of March 2019. The majority stake in the SPV will be transferred to a Sebi-registered Infrastructure Investment Trust (InvIT). RIL is seeking investors for the InvIT as Sebi guidelines require at least five non-sponsor entities for a privately placed InvIT.
On June 12 it has reported that the term sheet for the proposed sale of Reliance Jio’s telecom tower business to infrastructure asset manager Brookfield could be signed in the next 10 days. This would be the first step in the deleveraging process.
The two ways transfers could help Reliance Jio. One, any additional tenancy on these assets will drive down the lease rent for RIL linked to that particular asset as it gets the advantage as an anchor tenant, helping reduce operating expenditure at Jio. Two, the higher tenancy would improve inflows in the fiber SPV, leaving a surplus after commitments to liabilities and unitholders are honored.
The transfer of tower and fiber assets to the SPV has brought down Jio’s liability by Rs 1.07 lakh crore in March 2019. Consequently, the net debt of the company has come down to Rs 1.54 lakh crore by March 2019, compared with Rs 1.96 lakh crore in the previous quarter. Net debt to EBITDA ratio on a consolidated basis has reduced to 2.8 times in March, against a peak of 4.7 times in FY17.
The tower and fiber arm has received among the largest allocations in Jio’s capital expenditure of around $40 billion. The transfer of these assets to an SPV means that the InvIT will do incremental capital expenditure for these two assets. Hence, there will be no impact on future asset build-up on Reliance Jio’s balance sheet.
RIL’s FY19 CapEx was close to Rs 1.32 lakh crore, of which 52 percent went into the telecom arm.
Tower and fiber businesses absorbed nearly two-thirds of the telecom arm capital expenditure. So, the transfer of these two arms to the InvIT means capital intensity of RIL will moderate in the next few quarters. This should be quite favorable for investors as they have seen RIL put in close to Rs 7 lakh crore ($100 billion) in the past seven years on its refining, petrochemical, telecom and retail businesses.
