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Free From Debt Weight

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Mukesh Ambani's Reliance Industries (RIL), the largest private firm in India, is in a balance sheet-focused play. The energy giant aims to become debt-free this financial year. Here's how.

At the end of September, the company's gap between cash reserve and gross debt is less than Rs 10,000 crore, thanks to the sale of 30 per cent stake in 21 oil and gas blocks to BP.

"Being debt-free on a net basis allows the petroleum giant to raise huge loans for large international acquisitions. Also, further investments in new sectors such as broadband, financial services and power will be easier for RIL in any global financial condition," says a banker close to the company.

On 30 August, RIL and BP announced the completion of stake sale in 21 production sharing contracts that RIL operates in India, including the trophy KG-D6 block. In the last financial year, it received Rs 9,004 crore, a part of the total consideration of $7.2 billion from BP Exploration (Alpha), increasing its cash and cash equivalent portion  to Rs 42,393 crore. After six months, the cash portion further rose to Rs 61,490 crore on cash receivables from BP.

"With the cash flow, the company wants to reduce the debt component, and the cash reserve would be used mainly for investments in other sectors and acquisitions," says an RIL executive.

Two years ago, the company had a gross debt similar to the current level. But the cash in hand was just Rs 25,000 crore. In the past two years, the approach has been to service loans and raise more for working capital requirement.

With the completion of major capital expenditure at KG-D6 and the refinery construction at Jamnagar in Gujarat, the debt had started reducing for RIL in the period. But the company's plan to enter broadband business again spiked the liabilities.

RIL has deployed about Rs 17,000 crore towards its broadband business. Last year, the company bought 95 per cent stake (with an investment of Rs 4,202 crore) in Nahata family-owned Infotel Broadband Services. Infotel had successfully bid in all the 22 circles for broadband wireless access spectrum. After buying stake in Infotel, RIL had paid nearly Rs 12,850 crore to buy the spectrum. It is expected to launch its broadband services by mid-next year.

RIL's comfortable financial position places it one notch above India's sovereign rating by S&P and Moody's. The domestic debt has been rated AAA by Crisil (S&P subsidiary) and Fitch. The company now has its highest-ever cash balance and lowest-ever net gearing. The question is, now what?

(This story was published in Businessworld Issue Dated 07-11-2011)