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Reliance Industries-Aramco to re-evaluate O2C deal, what does it mean for the stock?

Analysts reckon the decision would not have any material repercussions on Reliance's fundamentals

November 22, 2021 / 12:37 PM IST
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Reliance Industries Ltd’s (RIL) shares were trading more than 3 percent lower in the morning trade on the National Stock Exchange on November 22. Not without reason.

The company said it had mutually decided with Saudi Aramco to re-evaluate a proposed investment in the O2C (oil-to-chemicals) business. In 2019, RIL announced at its annual general meeting (AGM) that Aramco would buy a 20 percent stake in the O2C division at an enterprise value (EV) of $75 billion.

Investors may have expected the deal to go through after the chairman of Aramco was inducted into RIL's board. To that extent, this development is a surprise.

In a statement on November 19, RIL said, “The current application with NCLT (National Company Law Tribunal) for segregating the O2C business from RIL is being withdrawn.”

Balance-sheet outlook  


If the deal had materialised, it would have set a valuation benchmark of $75 billion.

“We have lowered our multiple on the O2C business to reflect mid-cycle margins. We value the business at $70 billion (versus $80 billion earlier) at 7.5 times forward EV/EBITDA (versus 8.5 times earlier),” said analysts from Jefferies India in a report on November 20.

Also read: RIL, Saudi Aramco re-evaluate O2C investment, hive-off; what should investors do?

EBITDA is earnings before interest, tax, depreciation and amortization, a key measure of companies’ profitability.

Be that as it may, the outlook on the balance sheet is decent. “After the rights issue proceeds are received, we see RIL ending FY22E at consolidated debt of less than $10 billion. The balance sheet remains adequately de-levered to undertake capex in retail, Jio and renewable energy even without the Aramco transaction,” wrote Jefferies analysts.

Analysts reckon the Aramco deal being called off would not have any repercussions on RIL’s fundamentals.

For one, investor concerns regarding the company’s debt have eased significantly over the past two years, post the fundraising on the back of stake sales in its digital arm, Jio Platforms Ltd, followed by the retail arm, Reliance Retail Ventures Ltd.

The company has also raised money through a rights issue. Remember that the Aramco deal was initially expected to assist RIL’s plan to become a zero net debt company.

Secondly, at its AGM this year, RIL unveiled its plans for the new energy and materials businesses. The company intends to set up four giga factories at Jamnagar.

“We believe that this changes dynamics as Jamnagar is a place with major part of the O2C assets & is now envisaged to be the centre for clean energy. Indeed, RIL has unveiled its target to achieve Net Carbon zero by 2035 implying gradual move away from traditional energy to the new energy,” analysts from BofA Securities wrote in a report on November 22.

So, what next for investors in the RIL stock? 

“We see three key catalysts over the next couple of quarters, including (1) sustainable earnings recovery across business segments, (2) new digital product launches and (3) more details around new energy business, which according to our scenario analysis could drive 17 percent to 60 percent upside to our RIL current energy business valuation,” said analysts from Goldman Sachs in a report on November 22.

On the recovery, note that benchmark Singapore gross refining margins have seen a meaningful rebound, which should support earnings of RIL’s refining segment. The retail business is set to benefit as the economy recovers from the COVID-19 pandemic, consumer sentiment improves and footfalls rise.

Investors should also keep a tab on the prospects of potential tariff hikes in the telecom business.

As things stand, shares of RIL have appreciated around 20 percent, so far, in this calendar year.

Disclosure: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary. 

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.​

Pallavi Pengonda
first published: Nov 22, 2021 12:36 pm

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