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HomeMarket Live UpdatesAramco deal 're-evaluation' erases $9b in RIL market cap. What analysts said

Aramco deal ‘re-evaluation’ erases $9b in RIL market cap. What analysts said

NEW DELHI: Reliance Industries (RIL) and Saudi Aramco’s re-evaluation of the latter’s proposed $15-billion investment in the former’s oil-to-chemicals (O2C) business weighed heavy on investor sentiment, as stock erased nearly $9 billion or Rs 66,000 crore in market value in Monday’s trade.

There has not been much change in the stock’s price targets, though, as analysts say the deleverage balance sheet and expected free cash generation over the next few years will be adequate to fund the Mukesh Ambani-led company’s planned forays in new energy and new commerce businesses.

The stock fell 4.22 per cent to hit a low of Rs 2,368.20 on the BSE. At that price, the company’s market cap was down just over Rs 66,000 crore.

Credit Suisse, which has a neutral rating on RIL, said closure of the deal was a key catalyst for RIL. “The market was factoring in 100 per cent probability of the Aramco deal going through after the Chairman of Aramco was inducted into RIL’s board of directors. The key question from investors was only regarding the form of the deal: whether it will be an all-cash deal or a cash+stock deal. In this context, today’s disclosure on the Aramco deal not going through in the current form and in the near term is a negative surprise,” it said.

The market was factoring in a full $75-billion valuation for the O2C segment irrespective of refining and petrochemical cycle, which could change now, it said.

Jefferies cut RIL’s O2C business valuation to $70 billion and also cut its price target for the stock by 4 per cent to reflect this. It, however, added that the cancellation of the Aramco-RIL deal has no bearing on its balance sheet and that RIL has benign leverage; it has the ability to fund the renewable foray.

The news could be a sentiment for RIL stock price, said JPMorgan. This would, however, have limited impact, given that deleveraging at Reliance is done, it said.

The two companies had signed a non-binding letter of intent in August 2019 for a potential sale of 20 per cent stake in RIL’s O2C business to Saudi Aramco for $15 billion. RIL has now withdrawn its application with the NCLT to segregate its O2C business into a separate entity, while indicating that it may work with Aramco on broader areas of cooperation and will make future disclosures as appropriate.

“RIL’s decision to retract the sale of stake in O2C business delays the anticipated reduction in its exposure to the O2C value chain through the inorganic route. However, we do not see any impact on our fair value from this development as we were ascribing $61 billion of EV to refining and petrochemicals business, at a significant discount to the valuation of earlier proposed transaction,” Kotak Institutional Equities said.

Deven R Choksey, MD at KR Choksey Investment Managers said Reliance Industries is expected to generate Rs 2.5 lakh crore in Ebitda in the next two years, which would be sufficient to undertake future investments and manage its O2C business balance sheet including for expansion into speciality chemicals and also for reducing debt further.

He said the move will benefit RIL, as it will not have a holding company discount as envisaged earlier because of the creation of the O2C subsidiary. Besides, Reliance is moving ahead on a much larger scale in the new material business and that is probably asking them to look at the tie-up differently and not confining it to just O2C business with Aramco.

“If you look from Aramco’s point of view, what they are thinking is that this oil business is not the future. They also see the future in the new material business. Aramco has already announced their intention of becoming the largest supplier of green hydrogen fuels in future. Fundamentally, RIL remains well placed. Low market sentiments due to re-evaluation of Aramco deal should be used as an opportunity to buy afresh at lower levels,” he said.

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