Mukesh Ambani, announcing a delay in the proposed agreement with Saudi Aramco, raised concerns as to whether the Reliance Industries-Saudi Aramco transaction is now less desirable. Mukesh Ambani, chairman and managing director for RIL, informed shareholders on Wednesday, 15 July 2020, “Due to unforeseen circumstances in the energy market and the Covid-19 situation, the deal has not progressed according to the original timeline.” The billionaire punctuated his remarks on the deal saying, “Our equity requirements have already been met”.
A year ago, in August, when Ambani first announced Saudi Aramco's intention to invest in RIL's Oil to Chemicals (O2C) business, the deal was crucial to RIL's net debt-free target. The needs and options for both the seller and the buyer have shifted in less than 12 months. RIL now claims to be free of net debt and may not require cash proceeds.
For Saudi Aramco, the stake in Bharat Petroleum Corporation (BPCL) is another opportunity to engage in India's fuel demand growth story. “Ambani’s comment on the deal is a message to Aramco – RIL is no longer desperate for the deal,” stated an analyst.
In less than four months, RIL has earned Rs 2.12 trillion through rights concerns, joint investment in Jio Platforms, and BP's investment in its fuel retail business. This, Ambani said in his statement, is more than the company's net debt of Rs 1,61 trillion as of March.
“However, if the Aramco deal happens, the cash proceeds will help buffer any shocks in case RIL’s infrastructure investment trust (InvIT) plan does not work out. The deal there is yet to be completed”, the analyst stated. Last year, RIL transferred its telecommunications tower and fiber assets, together with associated liabilities, to two separate InvITs. Not much is known about Saudi Aramco's interest in the deal, there's no official word yet.
Analysts point out that with Covid-19's spiraling crisis and technological advancement in electric car mobility; concerns about Aramco's fossil fuel investment persist. “The work- from- home trend has changed mobility needs and electric cars are fast progressing technology-wise. This could well accelerate the decline of fossil fuel requirements. An oil company like Aramco also needs to de-risk,” said the analyst.
A few other analysts said the BPCL stake sale process offers the oil producer another option to tap into India’s fuel demand. Nitin Tiwari, an analyst with Antique Stock Broking, stated that “Covid-19 and its impact on fuel demand is a near-term phenomenon. Companies such as Saudi Aramco base their decisions on a long-term perspective. India is still an attractive market for an oil company like Aramco. However, with BPCL, Aramco also has options to choose from in India.”
In the meanwhile, RIL is expected to continue with certain regulatory approvals to facilitate the deal. Ambani said on Wednesday that RIL will approach the National Company Law Tribunal with a proposal to transform the O2C business into a separate entity to facilitate this partnership opportunity and to conclude this process by early 2021.
