RIL-Saudi Aramco Deal: Analysts’ Take On The Decision To Scrap Stake Sale
Shares of Reliance Industries Ltd. fell the most in more than 10 months after the Mukesh Ambani-owned conglomerate scrapped a plan to sell an equity stake to Saudi Aramco.
Analysts termed the decision as a negative but don’t expect it to limit RIL’s ability to fund clean energy growth.
RIL cancelled its plan to sell a 20% stake, valued at $15 billion, in its oil-to-chemicals business to Saudi Aramco as the Indian company focuses on renewable energy investments, according to its media statement. RIL also withdrew its application with the National Company Law Tribunal for segregating the O2C unit.
The oil-to-retail conglomerate, however, will continue to be Aramco’s preferred partner for investments in the private sector in India and will collaborate with Saudi Aramco & Saudi Basic Industries Corp. for investments in Saudi Arabia.
The deal was signed in 2019 but since then negotiations have dragged due to the crude producer’s initial public offer and the Covid-19 pandemic-led restrictions.
In the fiscal ended March 2021, RIL had initiated the process of reorganising its O2C business into a wholly owned subsidiary, hoping that it would facilitate value-creation through strategic partnerships and attract a dedicated pool of investor capital.
At its 44th annual general meeting in June this year, RIL announced a $10-billion (Rs 75,000 crore) investment in new energy and materials business. That aimed to build an ecosystem to make solar modules and batteries to hydrogen fuel cells in India.
Recently, a majority of RIL’s shareholders voted in favour of the appointment of Yasir Al-Rumayyan, chairman of Saudi Aramco and governor of the kingdom’s wealth fund—the Public Investment Fund—as an independent director on the RIL’s board.
Shares of RIL fell more than 4%, the most since Jan. 25, as of 9:25 a.m. on Monday. Of the 37 analysts tracking the company, 21 maintain a ‘buy’, 11 suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 10.1%.
Here’s how analysts view the re-evaluation of the proposed RIL-Aramco O2C deal…
Rates ‘neutral’ with a price target of Rs 2,450 apiece, implying a downside of 0.9%.
The disclosure on Aramco deal not going through in the current form and in the near term is a negative surprise.
The market was factoring in 100% probability of Aramco deal going through after the chairman of Aramco was inducted into RIL’s board of directors.
RIL did not mention any new timelines of the expanded Aramco deal, which is surprising given that due diligence on O2C business should have been done by now.
The market was factoring in full $75 billion valuation for the O2C segment irrespective of the refining and petrochemical cycle, which could change now.
Maintains ‘buy’ but cuts target price to Rs 2,880 apiece from Rs 3,000, still implying a potential upside of 16.7%.
With crude at $80 and Aramco’s chairman inducted into RIL’s board, this comes as a disappointment.
The deal could have set a valuation benchmark of $75 billion and acted as a catalyst for a re-rating of the O2C business.
The cancellation has no bearing on RIL’s balance sheet, which has benign leverage, and its ability to fund the renewable foray via cheap sources of capital. Adequate funds are available at very attractive cost to fund the company’s renewable foray.
Reduces O2C valuation to $70 billion compared with $80 billion earlier.
Maintains ‘buy’ with a target price of Rs 2,955 apiece, implying an upside of 19.5%.
Non-consumption of the deal is negative as it would have given RIL access to the latest petrochemical technologies along with assured crude supplies, while Aramco would have got access to one of the fastest-growing Indian markets.
Don’t rule out possibilities of more broad-based agreement in the future involving hydrocarbon and renewable energy.
Valued O2C business at $81 billion and did not factor in any benefit from the deal pending finalization, accordingly our valuation remains unchanged.
Rates ‘outperform’ at a target price of Rs 2,830, implying an upside of 14.4%.
Suspect business alignment and valuation of clean energy business as key reasons for non-completion of the deal.
The failure of the transaction will not limit Reliance ability to fund growth in clean energy as it has a net debt to equity of 0.01 times at the end of Q2 FY22 (cash of Rs 2,59,500 crore).
Values the O2C business at $69 billion based on peer multiples rather than the Aramco-implied valuation of $75 billion and therefore this does not change our value of the company.
Failure of the deal is likely to trigger a negative stock reaction in the short term, but, it does not alter the investment case or target price for Reliance.
Rates ‘neutral’ with a price target of Rs 2,575 apiece, implying an upside of 4.1%.
The announcement is a sentiment negative but will have limited financial impact, given significant de-leveraging achieved by RIL.
Operational progress and new energy business news flow will be the key stock drivers in the near term.
Rates ‘underperform’ with a price target of Rs 2,472.75 apiece.
With the deal cancelled, cash flows from the O2C division estimated at an average $5 billion per annum Ebitda capex, can be used to fund capex for the new energy division (initial commitment $10 billion), acquisitions, and other initiatives.
The market is already discounting a US$75 billion valuation for the O2C division.
Applying 8x EV-Ebitda on our mid-cycle Ebitda of $7.5 billion broadly implies $60 valuation, or Rs 160 per share valuation downside.