Companies

RIL-Aramco deal: A win-win for Reliance Industries

Anand Kalyanaraman | Updated on August 12, 2019 Published on August 12, 2019

Mukesh Ambani, Chairman, Reliance Industries along with his wife Nita Ambani and mother Kokilaben at the company's AGM held in Mumbai on Monday, August 12, 2019.   -  Paul Noronha

Balance-sheet deleveraging, strengthening crude oil supplies, and reduced dependence on the hydrocarbon business bode well for RIL.

BL Research Bureau

Reliance Industries (RIL) decision to sell a 20 per cent stake in its refining and petrochemicals business to Saudi Aramco at an enterprise value of $75 billion has many positives for the Indian behemoth.

One, it could help the company pare its debt, that has risen significantly in recent years. The deal should fetch RIL about $15 billion; this should help the company deleverage significantly and also aid in its expansion plans across businesses. A recent Credit Suisse report had raised some concerns about RIL’s debt levels. The brokerage had said that RIL’s financing liabilities had increased from $19 billion in FY 2015 to $65 billion in FY 2019, while its net debt had risen from $2.7 billion to $12.4 billion in this period and additional debt at the consolidated balance sheet rose from $9.4 billion to $20.6 billion. This had led to an increase in interest cost for the company from has risen $1.2 billion in FY 2015 to $4 billion in FY19 (including both reported and capitalised interest cost). To be sure, much of this increase in debt was to finance business expansion – in both the core hydrocarbon businesses (refining and petrochemicals) and the aggressive rollout of the new-age consumer-facing businesses – digital including RJio and retail, that have helped the company grow profits sharply. Seen in conjunction with the recent deals with Brookfield for the tower business and with BP in the fuel retailing business, this latest deal with Saudi Aramco should position RIL well. It should lead to sharp cuts in debt levels and also give the company additional firepower to continue its expansion drive, especially in the telecom business where the auction for 5G waves is on the anvil.

Read also: BP, Aramco deal to help RIL to be debt-free by March 2021

Next, it will further bolster RIL’s formidable crude sourcing capabilities that have traditionally given it an edge over many other competitors and aided its gross refining margin (GRM) - the difference between the price of the petroleum product slate and the cost of crude oil. Reports say that Saudi Aramco, among the largest oil producers in the world, will supply 500,000 barrels per day, or 25 million tonnes per annum, of crude oil to RIL’s twin refineries at Jamnagar in Gujarat. Not just the added security of supply, the deal could also bring RIL pricing advantages given that a key supplier will now also be an investor in the business. This will also have a positive knock-on effect on the petrochemicals business, which has crude oil as the main raw material. It will also, to an extent, cushion RIL from the uncertainties in the global crude oil market due to the US – Iran tensions.

Besides, this stake sale should help RIL accelerate its move towards increasing the share of the consumer businesses in the overall profit pie. The company has a plan of the consumer businesses achieving an equal footing with the hydrocarbon business, and they have been steadily increasing their share over the past few years. In the June 2019 quarter, the consumer-facing segments contributed 32 per cent of the consolidated segment EBITDA. This hedged business model approach has stood RIL in good stead. For instance, in what was a difficult June 2019 quarter for the core hydrocarbon business, the retail and digital businesses saved the day for RIL. The move helps RIL reduce its dependence on the hydrocarbon business, at a time when globally, and including India, the move towards electric vehicles (EVs) is picking pace.

The market, when it opens tomorrow, is likely to react positively to this stake sale move by RIL. Besides, value-unlocking, when it happens by the listing of the retail and digital businesses, can provide a good uptick to the RIL stock.

For Saudi Aramco, the 20 per cent stake buy in one of the world’s largest refining and petrochemicals businesses gives it a much sought after foothold in India – the third-largest consumer of crude oil in the world.

Published on August 12, 2019
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