Significant advantages exist in $15 bn Reliance Industries- Saudi Aramco deal: HSBC Global Research report

HSBC Global Research in a note said Aramco buying 20 percent in O2C business of Reliance would allow the Indian firm to build financial muscle as it carves out space for itself in highly competitive omni-channel retail

Press Trust of India May 13, 2020 19:04:51 IST
Significant advantages exist in $15 bn Reliance Industries- Saudi Aramco deal: HSBC Global Research report

New Delhi: Its recent capital raising decisions and weak oil prices may be raising doubts among investors on the conclusion of Reliance Industries' $15 billion deal with Saudi Aramco but there still exist significant advantages for the Saudi firm to conclude its investments in the oil-to-chemical business of the Indian giant, an analyst said on Wednesday.

HSBC Global Research in a note said Aramco buying 20 percent in O2C business of Reliance would allow the Indian firm to build financial muscle as it carves out space for itself in highly competitive omni-channel retail.

Skepticism may be rising that Saudi Aramco's proposed investment the O2C business, which RIL values at $75 billion, will not materialise.

"With RIL announcing its first-ever capital raising via a rights issue; the recent infusion of capital into (the firm's digital arm Jio Platforms) by Facebook; falling oil prices disturbing the financial position and attractiveness of oil assets; and no increment newsflow from Aramco, investors may be starting to believe that Aramco is no longer interested," it said.

Significant advantages exist in 15 bn Reliance Industries Saudi Aramco deal HSBC Global Research report

Representational image. Reuters.

However, RIL has reiterated that due diligence is being done and has filed for the separation of its oil-to-chemicals (O2C) business into a wholly-owned subsidiary.

"We still see enough reasons for Aramco to acquire a stake (in RIL's O2C business). With a stake, Aramco would not just have a stake in one of the world's best refineries and largest integrated petrochemical complex but also access to one of the fastest-growing markets - a ready-made market for 500,000 barrels per day of its Arabian crude and offering a potentially bigger downstream role in future," it said.

Richest Indian Mukesh Ambani had in August last year announced talks for sale of 20 percent stake in the O2C business, which comprises its twin oil refineries at Jamnagar in Gujarat and petrochemical assets, to the world's largest oil exporter. The deal was to conclude by March 2020 but is now expected within the current year.

HSBC said while the timing may be far from ideal, RIL might be a better fit for Aramco than the Saudi OTC.

Aramco expects to decide by H1 2020 whether to complete its joint venture with SABIC for a home-grown oil-to-chemicals (OTC) project at a guided price of at least $20 billion.

"However, Aramco has struggled in the past to profitably execute organic downstream projects in the chemicals space. In fact, with Rabigh, Sadara and Saudi Kayan, there is no history of a chemical plant in Saudi Arabia built at a cost of over $10 billion that has generated an economic return.

"We believe that if it comes down to capital discipline, it would be the Saudi OTC project that could be scrapped in favour of an investment in RIL," it said.

HSBC said the Aramco deal could provide significant financial muscle to RIL.

Besides creating a benchmark valuation for its OTC business of $75 billion, the deal would provide $15 billion in additional cash flow, shifting RIL into a strong net cash position from net debt.

HSBC, however, valued the O2C business at $65 billion.

"Once the money from the rest of its announced transactions flows into RIL, we believe that combined with its treasury shares, RIL will have $34 billion in assets that should allow it to expand in the competitive omnichannel retail space," it said.

"We believe RIL's diversified businesses, asset monetisation and capital raising in the current environment make it financially stable. In addition, the expansion of RIL's omnichannel retail and digital businesses should allow it to grow rapidly," it added.

RIL had announced three equity deals in as many weeks, including $5.7 billion investment from Facebook Inc, $750 million from Silver Lake Partners and $1.5 billion from Vista Equity Partners, in Jio Platforms -- the holding company for its wireless and technology business.

It also sold a 49 percent stake in its auto and jet fuel retailing business to UK's BP plc for $1 billion.

Besides refineries and petrochemical plants, the O2C business also comprises 51 percent stake in fuel retailing business. It, however, does not include the upstream oil and gas producing assets such as the flagging KG-D6 block in the Bay of Bengal.

RIL's refineries are one of the most complex in the world, allowing it to earn a significant premium to the benchmark Singapore gross refining margin. Its petrochemical complexes rank among the biggest in the world, whose dependency on outside raw materials is minimal. RIL has leadership positions both in the domestic polymer and polyester
markets.

According to RIL, every second child going to school in India wears a uniform made from RIL's polyester.

(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Firstpost)

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