Street expects RIL stock rerating after $15-billion Saudi Aramco deal

The investment by the world’s largest oil company Saudi Aramco in Reliance Industries (RIL) at higher valuations could reverse investor sentiment in the stock.  The RIL scrip was down 16 per cent in the last three months due to Street concerns on rising debt levels, continued investments, and profitability pressures in its core oil-to-chemicals business. 

Some of these concerns were addressed by the company’s Chairman and Managing Director Mukesh Ambani at the annual general meeting on Monday.  He indicated that the company, which had a net debt of Rs 1.54 trillion at the end of 2018-19, would become a zero net-debt company by the end of 2020-21. 

The key trigger for the stock is the acquisition of a 20 per cent stake in RIL’s refining and petchem business by Saudi Aramco at an enterprise value of $75 billion. 

This deal will result in an inflow of $15 billion (about Rs 1.05-1.10 trillion) into RIL, which the company can use for debt reduction. Moreover, the deal will also help it secure crude oil supplies from Aramco, which will send 500,000 barrels per day of crude oil to RIL’s refinery.

Gagan Dixit at Elara Capital says the investment is a positive development as the company gets Rs 1.05 trillion from Aramco and Rs 80,000-90,000 crore annually in terms of operating cash flow, which will help deleverage RIL in two years.

Further RIL had announced a joint venture in fuel retailing with British Petroleum, which will acquire  49 per cent stake in fuel retail business for Rs 7,000 crore.

Further the company had divested about Rs 1.17 trillion of telecom infrastructure into separate infrastructure investment trusts (InvITs) to better monetise and unlock value from these assets. Analysts expect the company receiving dividends from InvITs to the tune of Rs 12,000 crore per annum, helping it reduce its debt further.

Experts also feel that debt reduction could lead to a rerating for the stock. The programme to aggressively pursue deleveraging in businesses such as oil-to-chemicals, fibre and tower, and emerge as a zero-debt company in the next 18 months will strengthen the consolidated balance sheet, said Ajay Bodke, chief executive officer and chief portfolio manager (portfolio management services) at Prabhudas Lilladher.

The other triggers are the likely listing of retail and digital services businesses within the next five years, which would help unlock value from these businesses, says Abhijeet Bora at Sharekhan.