RIL announces India’s largest rights offer

The ~53,125-crore issue is expected to cut company’s net debt by a third

Reliance Industries Ltd (RIL) on Thursday declared the muchawaited details of its rights issue, which is not only India’s largest but the company’s first in nearly three decades. The company is planning to raise ~53,125 crore by issuing one equity share for every 15 shares held by eligible shareholders as on the record date, which will be announced later.

This would mean an equity dilution of 6.7 per cent at the proposed issue price of ~1,257 per share (including a premium of ~1,247 per share). The rights offer price is at a 14.3 per cent discount to RIL’S closing price of ~1,467.05, on Thursday.

The issue price is slightly higher than the street’s expectations. However, the entitlement ratio is a tad lower, which means lower equity dilution. Shareholders will need to pay 25 per cent at the time of subscription, and the rest in one or more instalments. Experts such as Naveen Kulkarni, chief investment officer at Axis Securities, say the pricing is confident. The promoters, led by Mukesh Ambani, will be subscribing to at least half the rights offer (given their shareholding; and any portion unsubscribed by other shareholders), which should create confidence.

Moreover, the company uses cash efficiently and hence adjusting for the cost of debt (that is to be reduced), the earnings impact may be negligible, says Kulkarni.

Analysts at Morgan Stanley had earlier said a potential rights issue size equivalent to 2-12 per cent of equity, if done at a 5-20 per cent discount to the current market price, would be earnings-accretive by 0.1-2.6 per cent as it lowered debt (including liabilities) of $41 billion (after the Facebook deal).

With the rights offer, RIL’S net debt will reduce by almost a third, while the overall debt will decline by 16 per cent.

The outstanding debt as on March 31, 2020, was ~3.36 trillion ($44.4 billion), and cash and cash equivalents stood at ~1.75 trillion ($ 23.2 billion).

The rights issue, coupled with Facebook’s investment (~43,574) and the previous deal by BP, will help RIL lower debt by ~1.04 trillion by June this year. RIL also said due diligence on the Saudi Aramco deal was on track. Jio Platforms has received an interest from other global investors for similar-sized additional stakes, it said. These may help revive hopes of the Aramco deal happening, even though at revised valuations, say analysts.

The company plans to become net debtfree by the end of FY21.