Reliance Industries Rating: buy: Nixing of Aramco deal a disappointment

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November 23, 2021 2:00 AM

Move to have no impact on balance sheet; valuation of O2C business cut to $70 bn from $80 bn; TP lowered to `2,880; ‘Buy’ maintained

A billboard featuring the Reliance Industries Ltd. founder Dhirajlal Ambani at an entry gate to the company's oil refinery in Jamnagar, Gujarat, India, on Saturday, July 31, 2021. The Indian city of Jamnagar is a money-making machine for Asia's richest man, Mukesh Ambani, processing crude oil into fuel, plastics and chemicals at the world's biggest oil refining complex that can produce 1.4 million barrels of petroleum a day. Photographer: Dhiraj Singh/Bloomberg

Both parties have decided not to proceed with the proposed transaction. This comes as a disappointment with crude at $80 and Aramco’s Chairman inducted into RIL’s Board, and fails to set a benchmark of $75 bn valn for 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. We lower O2C valn to $70 bn and cut PT by 4% to Rs 2,880. Maintain Buy.

RIL and Aramco call off O2C deal: RIL and Aramco have decided not to proceed with the proposed transaction involving the former’s O2C business. RIL said the business environment has changed between 2019 and now with lower leverage, higher focus on renewable energy (RE) and better than mid-cycle margins in the O2C business. The mix of stock vs cash could also have played a part, in our view.

Disappointment: 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 bn and acted as a catalyst for a re-rating of the O2C business.

No negative impact on RIL’s balance sheet: After the Rights issue proceeds are received, we see RIL ending FY22e at consolidated debt of less than $10 bn. The balance sheet remains adequately de-levered to undertake capex in retail, Jio and RE even without the Aramco transaction.

Cheap funding available for RIL’s renewable foray: We think adequate funds are available at very attractive cost to fund their renewable foray. We also note recent issuances of green bonds in India at attractive rates of 4-4.5%.
Cut O2C valuation, maintain Buy: We have lowered our multiple on the O2C business to reflect mid-cycle margins. We value the business at $70 bn (vs $80 bn earlier) at 7.5x fwd EV/Ebitda (vs 8.5x earlier). We lower our PT to Rs 2,880 (from Rs 3,000) and maintain Buy rating.

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