In 2020, Reliance Industries Ltd (RIL) set deal street on fire with large stake sales in its telecom and retail businesses and a rights issue. A news report now suggests that fundraising and deleveraging will continue in 2021, through a deal in the oil-to-chemicals business (O2C). The Economic Times reported that RIL’s talks with Saudi Aramco for a stake sale in its refining and petrochemcials business are back on track.
The deal has been in the works for around two years now, and was the first mega deal announced to shed weight in the RIL balance sheet. In August 2019, RIL had announced plans to sell a 20% stake to Aramco in the O2C business at an enterprise value of $75 billion. However, reports later suggested that there were differences on valuation, with the pandemic driving down profits and valuations of businesses the world over.
Now that the company has raised around $33 billion ( ₹2.5 trillion) in the past year, the need to deleverage is hardly a motivation for RIL. As such, it is likely to stick to its high valuation expectations, though profits of the O2C business have declined because of the pandemic.
For Aramco, on the other hand, paying a premium for a strategic stake may still make sense.
The Saudi state-owned oil company has been increasing its footprint in downstream businesses, buying stakes and entering into joint ventures in large companies in countries such as South Korea, Malaysia, and China. A stake in RIL will give it access to a huge Indian market and technologically advanced RIL assets. While there is a move globally towards electric vehicles, with the need for crude gradually expected to reduce, this trend is expected to play out slowly in India.
As such, it makes sense for Aramco to have a strategic presence in the country, said analysts.
Meanwhile, the oil to chemical business has been rebounding well for RIL. There are limited refinery expansions in the country, and this is positive for Reliance Industries’s refining business. If it gets a premium based on all of these factors, it will help re-rate the stock. RIL shares have been underperforming the market over the past five months, after a period of massive outperformance in the preceding six months.
RIL’s relative valuation vis-a-vis global peers has returned to long-term averages, a first since its asset monetization, analysts at Morgan Stanley Asia Ltd said in a recent note to clients.
The significant recovery seen in forward refining spreads, above mid-cycle chemical margins, and the upside in consumer retail could see consensus earnings rise from the trough, they said.
On the flip side, growth in the telecom business has turned sluggish and analysts expect the company to increase its spectrum holdings in the upcoming auctions to improve growth.
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