Fresh overhang for Reliance Industries as govt tries to block Aramco deal

Government's demand for pending dues may delay company's plan to reduce debt

Some nervousness set in for investors of Reliance Industries (RIL), following news that the government may curb the company’s deal to sell 20 per cent stake (worth $15 billion) to Saudi Aramco in its oil-to-chemicals business.

The stock, which has risen more than 46 per cent in a year and scaled new highs on Friday, fell over 3 per cent in intraday trade before ending down 1.78 per cent on Monday.

The government’s attempt to block the RIL-Aramco deal is in view of pending dues estimated at $3.5 billion, with respect to Panna-Mukta and Tapti oil and gas fields, something which RIL is disputing.

However, analysts say while the Centre may be trying to safeguard its dues, there is no clarity on total dues pending or decision by the arbitration panel. Also, the demand will be inclusive of interest, penalties, etc and RIL too will present its legal stand in the matter.

So, while investors need to be watchful on the developments, analysts also point out that the arbitration demand is pertaining to the oil exploration and production business, while RIL is selling stake in the refining and chemicals business. Hence, technically they are two different segments.

Nevertheless, some overhang of the government’s latest move is not ruled out as the legal proceedings can potentially delay the Aramco deal closure. The deal is important as the proceeds from the stake sale were to help RIL cut its debt substantially.

Nilesh Ghughe at HDFC Securities says while he will watch progress in the case, fundamentally, RIL remains well-placed to grow. The growth is expected to be driven by businesses such as telecom and retail, as outlook for the petrochemicals (petchem) business remains soft, looking at the supply glut (new capacities in the US, Europe, and China).

The expected boost to refining margins from implementation of IMO norms also remain priced in the stock, say analysts. It is the increase in Reliance Jio tariffs that have recently led to brokerage upgrades, while retail business is also seen as a strong earnings driver.

Analysts at Centrum Broking believe that the tariff increase will drive a structural correction upwards in revenue models for all telecom players, which should drive further value for Jio over the next 12-18 months.

Overall and barring any adverse developments, despite factoring in a steady decline in petchem segment’s profitability and refining margins of sub-$10 per barrel, analysts expect RIL’s earnings to grow 23 per cent annually over FY19-22.