MUMBAI - Mukesh Ambani just put a strong buy rating on his oil-to-retail empire. The tycoon will backstop a $7 billion discounted rights issue by Reliance Industries, helping him to keep a pre-pandemic promise to slash the company’s net debt to zero. The record stock sale for India partly fills a gap left by a delayed investment from Saudi Aramco sketched out last August. And although the amount being raised is half as much as that deal promised, the issuance carries bigger symbolic significance.

The $124 billion company was counting on outside assistance to trim net debt of $21 billion, equivalent to less than two times EBITDA. The plan to make Reliance more tech-like is working. It trades at about 19 times expected earnings, up from roughly 11 times in the three-and-a-half years since it started Jio. The superfast mobile broadband operator now has 388 million subscribers.

Reliance had lined up $15 billion from Saudi Aramco for 20% of its oil-to-chemical business. It’s a strategic deal for the Gulf giant but will be hard to complete with oil so cheap. India, as the world’s third-largest importer, is too good for Aramco to give up. It is therefore likely to drag its feet on closing to avoid the perception of having overpaid.

With that investment on the backburner, proceeds from Reliance’s rights issue should now account for about half the $14 billion of inflows expected this year. That includes $5.7 billion from Facebook for 10% of Jio Platforms, and another $750 million from buyout shop Silver Lake just announced on Monday. There also will be proceeds from a fuel retailing joint venture with British energy giant BP BP.L . More transactions are anticipated involving Reliance’s telecom towers and fibre networks.

Ambani and related entities already own about half of Reliance’s equity, but Asia’s richest man is also now on the hook for another $3.5 billion to cover the rest of the share allotment. Investors, however, are seeking shelter in the biggest and best Indian companies as Covid-19 containment measures wreak havoc. By promising to dig deep into his own pocket, Ambani should be instilling enough confidence that he won’t have to.

 

CONTEXT NEWS

- Reliance Industries on April 30 announced plans for a rights issue worth 531.3 billion rupees ($7 billion).

- The Indian conglomerate will issue shares at 1,257 rupees each, a 14% discount to the closing price on April 30. Mukesh Ambani, the chairman and largest shareholder, and entities related to him will backstop the issuance by buying any unsubscribed shares.

- Reliance on the same day reported a 37.2% decline in net profit in the three months to end March from a year earlier, including inventory holding losses across its oil-to-chemicals business. Its revenue fell 2.5%.

 

 (Editing by Jeffrey Goldfarb and Sharon Lam) ((una.galani@thomsonreuters.com; Reuters Messaging: una.galani.thomsonreuters.com@reuters.net))