Decoding Reliance Industries’ Transaction With Brookfield And Its June-Quarter Earnings

Reliance Industries Ltd.’s debt would reduce by 4 percent after it divests its entire stake in its tower assets.

The Mukesh Ambani-controlled company would raise nearly Rs 12,105 crore—four percent of its Rs 2,88,243 crore debt—as Canada’s Brookfield Asset Management and other unnamed investors plan to invest in the Tower Infrastructure Trust, which is sponsored by RIL’s wholly-owned unit Reliance Industrial Investments and Holdings Ltd.

How Is The Deal Structured?

Brookfield and the other investors will pump in Rs 25,215 crore for new units which will be offered by Tower Infrastructure Trust, getting control of the trust that owns 51 percent stake in Reliance Jio Infratel Pvt. Ltd.—the company which owns the tower assets. These funds will be used by the trust to buyout the remaining 49 percent stake, owned by Reliance Industries, and repay existing liabilities.

The trust will infuse Rs 25,000 crore in the form of non-convertible debentures in Reliance Jio Infratel and will use Rs 105 crore to buyout the remaining 49 percent stake held by Reliance Industries. Reliance Jio Infratel will use the fund infusion to replace its existing liabilities worth nearly Rs 37,000 crore, including Rs 12,000 crore owed to Reliance Industries.

That’s how RIL will get Rs 12,105 crore by selling its entire stake in the tower assets. The amount is also less than half the average quarterly capital expenditure incurred by the company. RIL’s leverage, after this transaction, would fall to 3.3 times from 3.4 times at the start of the financial year.

Earlier, Reliance Industries transferred its entire tower portfolio to an infrastructure investment trust. It d its 1.75 lakh tower assets at Rs 36,800 crore, some of which are under-development. The exact number wasn’t provided by the company.

How Did Reliance Jio Fare?

Reliance Jio Infocomm Ltd. reported an operating profit of Rs 4,670 crore for the quarter ended June against analyst expectations of Rs 3,683 crore. That’s due to the telecom arm of Reliance Industries adopting IND AS-116 accounting standards, capitalisation of fiber usage cost and sharp dip in other costs.

Reliance Jio has seen a favourable impact of Rs 372 crore on its operating profit due to applicability of the new accounting standard. This coupled with capitalisation of fiber usage cost—as it pertains to fiber-to-home business that’s yet to be rolled out commercially—and a sharp dip in employee and access cost aided Jio.

Access charges dropped 23 percent to Rs 851 crore as the number of calls to other networks decreased, while employee cost fell by 14 percent to Rs 392 crore due as some of them have been transferred to the respective tower and fiber infrastructure investment trusts.

However, on the revenue front, the numbers were below analyst estimates as the company earned lower revenue from every user. Reliance Jio’s average revenue per user declined for the seventh consecutive quarter and fell the most in last five quarters as the number of JioPhone users increased, subscribers adopted long-term packs and increase in digital recharges led to more cash backs, thereby negatively impacting the average revenue per user.

RIL’s Performance In Q1

Reliance Industries on a standalone basis reported a mixed set of numbers with gross refining margins missing estimates, while operating profit met and net profit beat analyst expectations in the June quarter.

Net profit came in ahead of analyst estimates on the back of higher other income and lower other expenses. Other income increased by 16 percent, while other expenses fell by 15 percent over last quarter.

RIL’s gross refining margins came in marginally lower compared with last quarter at $8.1 per barrel—a five-year low—because of weaker refining environment. However, higher refining volumes aided financials. Refinery throughput increased by nine percent compared with last quarter to 17.5 million metric tonnes.

Petrochemical business was impacted by lower volumes, resulting in revenue declining the most in at least 15 quarters. However, tighter cost controls and favourable raw material prices aided margin.

The retail segment’s performance stood out yet again despite slowing economic environment. The segment’s EBIT margin was stable at 4.65 percent, with revenue and EBIT growth rates slowing to a ten-quarter low.