The stake sale in O2C biz to Aramco, announced in 2019 AGM, has remained a key expectation
If RIL manages to strike a deal at $75 billion valuation for O2C biz, it will be good as far as de-risking plans go
Ever since 2016, when the commercial launch of Reliance Jio’s telecom services was announced at Reliance Industries Ltd’s (RIL) annual general meeting (AGM), expectations have run high for every upcoming annual shareholders’ meet.
The last two AGMs were eventful as well. The company announced its plans to become debt-free in 2019, and then executed it way beyond the Street’s expectations. The 2020 AGM witnessed a cameo by Sundar Pichai, CEO at Alphabet Inc. and its subsidiary Google, where the global tech major announced a large investment in an RIL subsidiary as well as a partnership to develop an affordable smartphone.
As usual, expectations are running high with regard to big bang announcements in the 2021 AGM due this week. RIL shares have risen 12% in the past one month, beating the 4% gains in the Nifty 50 index.
Interestingly, some of the expectations are tied in to announcements made in the previous two AGMs. The stake sale in oil to chemicals (O2C) business to Saudi Aramco, which was announced in the 2019 AGM, has remained one of the key expectations of the Street.
RIL had announced plans to sell a 20% stake to Aramco in the O2C business at an enterprise value of $75 billion. But falling crude oil prices and uncertainties pertaining to refining and petrochemicals business outlook were a few reasons cited by analysts for the deal not materializing.
Recent reports suggesting that a Saudi Aramco representative will join the RIL board have reignited hopes of the deal going through. What’s more, crude oil prices have recovered smartly, and the outlook for the refining and petrochemical business is improving. Stocks of global refining firms such as Valero Energy Corp. and Marathon Petroleum Corp. have inched back close to pre-covid highs, having risen 42-49% year-till-date. Refining margins are likely to improve further as large-scale vaccination drives may result in an improved demand outlook globally.
And concerns about low crude prices and Aramco’s ability to do a large acquisition have receded with crude recovering smartly. Of course, RIL is now in a much better position financially, and is under no compulsion to reduce debt.
Yet, if it manages to strike a deal at a $75 billion valuation for the O2C business, it will be a good move as far as its de-risking plans go. Besides, the energy business is expected to decline, with the sharp rise of electric vehicles and other environment-friendly products, and offloading a part of its ownership will be cheered by investors. For Aramco, on the other hand, a deal will help it de-risk its large upstream exposure.
Analysts, however, say that if business garners lower valuations than the earlier reported figure of $75 billion, investors will be disappointed.
Investors will also look for concrete updates on the Google smartphone which was announced in last year’s AGM. Reports suggest there have been delays and supply chain issues, which are likely to impact the roll-out of the affordable smartphone, at least in terms of the supply that’s available at launch later this year.
After the smart gains seen by the stock ahead of the AGM, announcements will need to match expectations. “Over the last 10 years, trading volume has surged around the AGM, but the RIL stock outperformed the Nifty 50 post AGM only 6 out of 10 times," said analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd in a report.
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