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Aramco deal may add 8-10% to RIL stock’s target price

In fuel marketing, the company has given 49 per cent stake to BP for Rs 7,000 crore.

, ET Bureau|
Aug 13, 2019, 07.49 AM IST
ET Intelligence Group: Reliance Industries (RIL) has lost over 9 per cent of its market capitalisation in just one month on concerns over burgeoning borrowings on its balance sheet. Its decision to raise funds by selling equity stake in its refining, fuel retailing and petrochemicals business to Saudi Aramco should allay these fears. This is second major deleveraging exercise undertaken by the refining-to-telecom-to-retail conglomerate in past five months to de-leverage its balance sheet. In April, the company transferred telecom assets worth Rs 1.1 lakh crore to an infrastructure investment trust.

The cash inflows from the deal with Saudi Aramco may add Rs 120-150 per share to the fair value of Reliance Industries as lower debt burden would enhance equity value. This implies 8-10 per cent addition to the current consensus target price of 1,379, according to Bloomberg. The implied valuation in terms of enterprise value (EV) relative to operating profit before depreciation and amortisation (EBITDA) for 20 per cent stake in the hydrocarbon assets worth $15 billion is about 7.5 times, considering FY21 earnings. This is higher than the street’s expectation of 6-6.5 times.

RIL has clubbed these assets under the oilto-chemical division, which consists of refining, petrochemical and fuel marketing. In fuel marketing, the company has given 49 per cent stake to BP for Rs 7,000 crore. This means the total cash inflows from the deal with Saudi Aramco and BP would be around $16 billion (Rs 1.13 lakh crore) and the total amount will go to RIL’s treasury pool.

These two deals will help the company to reduce the net debt of Rs 1.5 crore as of June 2019. In addition, the company is having certain deferred liability and several other financial liabilities (such as capex creditors, crude payables and advances from customers).

According to Credit Suisse calculations, the total liability of the RIL reached $65 billion in FY19 compared with $19 in FY15. Similarly, according to Kotak Institutional Equities, the gross borrowings and liabilities before de-merger of tower and fibre asset stood at Rs 4.6 lakh crore. The street was expecting net debt of Rs 2-2.3 lakh crore while forecasting for the earnings of the next fiscal year. However, the fund proceeds from Aramco and BP will result in zero net debt. The deal may possibly turn the non-telecom assets debt free. This will make more resources available for the consumer businesses which fetch higher valuation. At Friday’s closing stock price of Rs 1,161, the RIL stock was traded at 14.2 times one-year forward earnings compared with the 10-year average of 12.7. The premium to longterm average may sustain on account of the prospects of deleveraging.

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