Reliance-Aramco Deal: What The Decision To Scrap Stake Sale Means

After two years of diligence that pegged the valuation of oil-to-chemicals division at $75 billion, Reliance Industries Ltd.'s plan to sell an equity stake to Saudi Aramco did not succeed. Yet, that’s unlikely to change much for the company that has successfully raised cash to turn net debt-free, and committed investments to build a renewable energy ecosystem.

The move to scrap the deal will, in fact, benefit RIL as it will not have a holding company discount as envisaged earlier because of the creation of an O2C subsidiary, said Deven Choksey, managing director at KR Choksey Investment Managers. Reliance is expected to generate Rs 2.5 lakh crore in operating income in the next two years, which would be sufficient to undertake future investments and reduce debt, he said.

The process to monetise the oil-to-chemicals business began in 2019 when billionaire Mukesh Ambani, Asia’s richest man, announced a plan to cut debt at the refining-to-retail group he controls. Reliance decided to hive off the Jamnagar-based refining complex and sell 20% stake at an enterprise value of $75 billion to Aramco.

In the two years that followed, the company financially consolidated its O2C operations and was awaiting final clearance from the National Company Law Tribunal to demerge.

Bernstein valued the unit at $69 billion—the refinery and petrochemical business at 7.5 and 7.9 times the estimated enterprise value-to-Ebitda multiple for FY23, respectively. That’s in line with valuation of global peers.

However, much has since changed for the company. It was able to bring in Rs 2.6 lakh crore ($36 billion) via rights issue, selling stake in Jio Platforms Ltd. and Reliance Retail Ventures Ltd. to a clutch of global investors including Google and Facebook Inc. That helped the company become net debt-free.

Ambani has also lined up $10-billion in investments for its new energy and materials business based out of the Jamnagar complex.

So both Reliance and Saudi Aramco agreed to re-evaluate the proposed investment in the O2C business in light of the changed context, the company’s statement said. It has also withdrawn its application to subsidiarise the division.

Triggers For The Move

Reliance is moving ahead on a much larger scale in the new materials business and that is probably pushing them to look at the tie-up differently and not confining it to just O2C business, said Choksey. “If you look at Aramco’s point of view, what they're thinking is this oil business is not the future. Their future is also in the new material business.”

Reliance plans to set up four giga factories at the Jamnagar complex. These include:

• An integrated solar photovoltaic module factory for the production of solar energy.

• An advanced energy storage battery facility for the storage of intermittent energy.

• An electrolyser unit for producing green hydrogen.

• A fuel cell factory for converting hydrogen into motive and stationary power.

And that blueprint is in place with recent acquisitions and investments worth $1.2 billion. These acquisitions will provide Reliance the expertise and technology to start building a fully integrated renewable energy ecosystem.

Reliance New Energy Solar Ltd., a fully owned unit of Reliance, has so far acquired:

• 100% stake in REC Solar Holdings, a global player in solar cells, panel and polysilicon manufacturing, at an enterprise valuation of $771 million.

• 40% stake in Sterling & Wilson Solar Ltd., an EPC and O&M services provider in the renewables sector, for an overall outlay of Rs 2,840 crore ($379 million).

• $50 million in Ambri Inc. in a transaction along with other partners to help the entity commercialise its patented liquid metal technology for long-duration energy storage systems.

• Reportedly signed an agreement with Stiesdal Fuel Technologies for developing, manufacturing and deploying a hydrogen electrolyser in India.

Reliance plans to set up the solar module unit with an initial capacity of 4 GW, which will be scaled up to 10GW. The company has bid for 4GW of capacity under production-linked scheme.

According to Kotak Securities, the company will have to invest $3 billion to set up 10GW of integrated capacity, which can potentially generate Ebitda of Rs 4,600 crore in a steady-state environment.

Bernstein has already valued the new clean energy business at Rs 2.67 lakh crore ($36 billion), while Morgan Stanley anticipates value creation of up to Rs 4.45 lakh crore ($60 billion).

Yet, Choksey said Reliance will have Aramco joining hands for the new materials business if it wants to be the global player.