Highlights-Mega $15 billion deal with Aramco, biggest ever FDI for India -Aramco to buy 20 percent stake in refining and petchem businesses -Deal value accretive for RIL -Downstream business positioned to grow in partnership with BP -RIL transforming from a commodity-driven business into a consumer-centric one
-Transformation to bring higher multiples, deals to bring stock rerating
Marking one of the biggest foreign direct investments in India, Reliance Industries (RIL) (CMP: Rs 1,162; mcap: Rs 7,36,602 crore) in its AGM on Monday announced plans for a long-term partnership with Saudi Aramco for a 20 percent stake in its petchem and refining businesses.
The deal assigns an enterprise value of $75 billion for the businesses. As part of the deal, Saudi Aramco will also supply 500,000 barrels of oil to RIL’s Jamnagar refinery. This deal comes post announcement of a joint venture with BP in the fuel retailing business.
Together, both the deals indicate a systematic monetisation of the built-up assets and an end to the aggressive capex cycle for the company.
The Aramco deal is one of the biggest investments in India and the high valuation calls for attention. We believe that this would be value accretive for the company and will also lead to strengthening of its balance sheet.
The Aramco proposal
The Aramco deal proposes an investment to the tune of $15 billion (Rs 1,06,410 crore) and will account for a 20 percent stake in the refining and petchem businesses -- together classified as oil to chemical business -- thereby valuing the two segments at an enterprise value of around $75 billion (Rs 5,31,750 crore). While the investment is awaiting regulatory approvals, the completion is expected by March 2020.
The joint venture with BP
In a separate deal announced earlier, RIL is forming a JV with BP in the fuel retailing business where RIL will hold 51 percent and 49 percent will be held by BP. The JV would include the 1,400 fuel retail outlets, along with the aviation fuel business, at over 30 airports across India. The deal will fetch RIL around Rs 7,000 crore.
The Aramco deal impact
The deal values the refining and petchem business of the company at $75 billion or an EV/EBITDA multiple of around 10.2x, which is higher than expectations. This higher than expected valuation will help unlock value in these segments and a rerating is expected on the stock.
The deal will bring in around Rs 1,00,000 crore plus investment into the company, which will help in paying off a portion of the approximately Rs 1,50,000 crore segment debt, thus strengthening the balance sheet. This also falls in line with the announcement to be net debt free by March 2021. This will be a reassurance to the investors about the systematic monetisation of the business.
Repayment of debt would mean a reduction in the interest cost for the company. This would mean approximately 7-8 percent positive impact on the EPS from the deal.
The investment will bring in partnership with Saudi, which is an important source of crude oil for Reliance. Under the deal, Saudi Aramco will supply 500,000 barrels per day of crude to RIL’s Jamnagar refinery. This will help in ensuring a steady throughput at the refinery, thereby mitigating any risk.
Partnership with Saudi Aramco which is the biggest oil company in the world, opens doors to international markets and enhanced global image for RIL.
The BP joint venture
BP holds a 30 percent stake in Reliance’s KG-D6 basin, which is expected to produce over 30 mmscmd of natural gas from FY22. This earlier JV with BP has a commitment of Rs 35,000 crore investment in the three deep water fields in the block. These will commence production from the first half of 2020.
The current JV expands the partnership with BP to downstream business. It will lead to rapid expansion of oil retail business with a strong jump in fuel outlets over the next five years. While the jump is small relative to OMCs’ plans for 28,000 retail outlets additions over the next five years, it will surely enhance the company’s market share. Investments into the JV will also create a base for RIL in positioning to build a fast charging infrastructure for the much in-focus electric vehicle market, which could be beneficial in future. This JV would also enhance cross selling of BP products at RIL outlets.
We see the current monetisation of the assets and the eventual deleveraging of the balance sheet as a much-needed move for the company. Together with various other developments in the retail and digital businesses, we see a planned shift of the company from a commodity-oriented business to a consumer centric one. This we believe would aid a rerating for the stock.
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