HSBC Global Research in a note said Aramco buying 20 per cent in O2C business of Reliance would allow the Indian firm to build financial muscle as it carves out space for itself in highly competitive omni-channel retail.
Scepticism may be rising that Saudi Aramco's proposed investment the O2C business, which RIL values at USD 75 billion, will not materialise.
"With RIL announcing its first-ever capital raising via a rights issue; the recent infusion of capital into (the firm's digital arm Jio Platforms) by Facebook; falling oil prices disturbing the financial position and attractiveness of oil assets; and no increment newsflow from Aramco, investors may be starting to believe that Aramco is no longer interested," it said.
However, RIL has reiterated that due diligence is being done and has filed for the separation of its oil-to-chemicals (O2C) business into a wholly-owned subsidiary.
"We still see enough reasons for Aramco to acquire a stake (in RIL's O2C business). With a stake, Aramco would not just have a stake in one of the world's best refineries and largest integrated petrochemical complex but also access to one of the fastest-growing markets - a ready-made market for 500,000 barrels per day of its Arabian crude and offering a potentially bigger downstream role in future," it said.
Richest Indian Mukesh Ambani had in August last year announced talks for sale of 20 per cent stake in the O2C business, which comprises its twin oil refineries at Jamnagar in Gujarat and petrochemical assets, to the world's largest oil exporter. The deal was to conclude by March 2020 but is now expected within the current year.
HSBC said while the timing may be far from ideal, RIL might be a better fit for Aramco than the Saudi OTC.
Aramco expects to decide by H1 2020 whether to complete its joint venture with SABIC for a home-grown oil-to-chemicals (OTC) project at a guided price of at least USD 20 billion.
"However, Aramco has struggled in the past to profitably execute organic downstream projects in the chemicals space. In fact, with Rabigh, Sadara and Saudi Kayan, there is no history of a chemical plant in Saudi Arabia built at a cost of over USD 10 billion that has generated an economic return.
"We believe that if it comes down to capital discipline, it would be the Saudi OTC project that could be scrapped in favour of an investment in RIL," it said.
HSBC said the Aramco deal could provide significant financial muscle to RIL.
Besides creating a benchmark valuation for its OTC business of USD 75 billion, the deal would provide USD 15 billion in additional cash flow, shifting RIL into a strong net cash position from net debt.
HSBC, however, valued the O2C business at USD 65 billion.
"Once the money from the rest of its announced transactions flows into RIL, we believe that combined with its treasury shares, RIL will have USD 34 billion in assets that should allow it to expand in the competitive omnichannel retail space," it said.
"We believe RIL's diversified businesses, asset monetisation and capital raising in the current environment make it financially stable. In addition, the expansion of RIL's omnichannel retail and digital businesses should allow it to grow rapidly," it added.
RIL had announced three equity deals in as many weeks, including USD 5.7 billion investment from Facebook Inc, USD 750 million from Silver Lake Partners and USD 1.5 billion from Vista Equity Partners, in Jio Platforms -- the holding company for its wireless and technology business.
It also sold a 49 per cent stake in its auto and jet fuel retailing business to UK's BP plc for USD 1 billion.
Besides refineries and petrochemical plants, the O2C business also comprises 51 per cent stake in fuel retailing business. It, however, does not include the upstream oil and gas producing assets such as the flagging KG-D6 block in the Bay of Bengal.
RIL's refineries are one of the most complex in the world, allowing it to earn a significant premium to the benchmark Singapore gross refining margin. Its petrochemical complexes rank among the biggest in the world, whose dependency on outside raw materials is minimal. RIL has leadership positions both in the domestic polymer and polyester markets.
According to RIL, every second child going to school in India wears a uniform made from RIL's polyester.