The Hindu Business Line

Aramco deal: A win-win for Re­liance

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

- ANAND KALYA­NARA­MAN Business · Saudi Aramco · Saudi Aramco (United States) · Credit Suisse Group · Switzerland · Brookfield Asset Mgmt · British Petroleum · Jamnagar · Gujarat · United States of America · Iran · India · Reliance Industries

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, which 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 FY2015 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.

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 knockon 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.

May help con­sumer biz

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 is pick­ing pace.

The mar­ket, when it opens to­mor­row, is likely to re­act pos­i­tively to this stake sale move by RIL. Be­sides, val­ue­un­lock­ing, 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 soughtafte­r foothold in In­dia – the third-largest con­sumer of crude oil in the world.

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