Reliance Industries Ltd (RIL [ Get Quote ]), sitting on a huge cash pile of Rs 80,000 crore (Rs 800 billion) and having just raised another Rs 4,264 crore (Rs 42.64 billion) as a perpetual bond (perp bond), plans to use the money to repay loans and expand capacity in its petrochemicals, oil and gas and refining businesses.
The Mukesh Ambani-owned company, which has gone on a massive fund raising drive abroad this financial year, is also investing Rs 10,653 crore (Rs 106.53 billion) in Venezuela and another Rs 2,644 crore (Rs 26.44 billion) in its retail business.
RIL has not yet officially announced any firm plan for usage of its cash pile, apart from implementing a massive $8-billion expansion of its petrochemical capacity.
Insiders say the latest exercise to raise funds from abroad is part of a liability management programme, as repayments of many loans are also coming up in the near future.
“RIL will use these funds to finance its capex programme. The quality of investors reflects RIL's excellent credit rating and it is among the select issuers from Asia that can access these markets,” says Asit Bhatia, managing director & co-head of investment banking at Bank of America Merrill Lynch.
RIL currently earns higher yield on its cash than the interest outgo on its debt but its return on capital employed has suffered, say analysts.
Apart from the perp bond, in this financial year alone, Reliance has already raised close to $4 billion from abroad.
Another worry for Indian companies while raising funds abroad is the foreign exchange risk. With the volatility in the rupee, companies raising funds abroad have to buy forward premium cover, which adds another 6 per cent to the cost of funds.
But as Reliance is earning a substantial portion of its revenue in dollars by way of exports, company insiders say its foreign currency risk gets lower.
“Reliance has a very, very large export book, which protects them from any foreign exchange fluctuations,” says a banker.
Export revenue for the nine-month period till December 2012 was Rs 67,000 crore or $12.2 billion, which makes up for any forex risk. Besides, RIL’s sales to Indian public sector companies are also pegged to the dollar, helping it manage the forex risk.
In a statement on the announcement of the perpetual bond, V Srikanth, joint chief financial officer, said the company was delighted that top quality institutional and retail investors equally participated in the bond offering.
“This is a strong testimony to our credit profile as we extend our debt maturities, diversify our sources of financing and, at the same time, retain the flexibility to manage the cost of debt,” he said.
On the use of the cash pile, insiders say RIL is looking at investing close to Rs 10,653 crore or $2 billion in Venezuela’s oil and gas industry; it awaits more data from the South American country before starting its due diligence.
Besides, after a long hiatus, it has started investing again in its exploration and production work, commencing with drilling in another gas development well in the D6 block of the Krishna-Godavari basin, recently completed.
RIL is likely to bring back a second deepwater rig by June-July this year for the K-G block.
In America, the company has drilled 54 new wells in three shale gas projects. Production from its shale gas assets rose 16 per cent sequentially and clocked $330 mn earnings before depreciation and tax during the first nine months of this financial year.
However, analysts say the returns are not commensurate with the capital investment of $5.2 bn in shale gas projects.
The company has also announced plans to invest another $500 mn or Rs 2,644 crore on its retail business but no news has yet come on its telecom rollout, delayed considerably.