Mukesh Ambani might net billions by selling a stake in his refinery business to the ‘world’s most profitable company’

• Mukesh Ambani’s Reliance Industries is reportedly in talks to sell a 25% stake in its refinery and petrochemicals unit to Saudi Aramco.
  
• The deal with Aramco - dubbed the world’s most profitable company after it reported a net income of $111 billion last year (twice as much as Apple) - is expected to net $10 billion for Reliance.
  
• The deal will allow Reliance to finance the expansion of its refinery in Jamnagar, Gujarat.

Mukesh Ambani’s Reliance Industries is reportedly in talks to sell a 25% stake in its refinery and petrochemicals unit to Saudi Aramco, the state-owned oil company of Saudi Arabia, according to a Bloomberg report citing sources.

The deal with Aramco - dubbed the world’s most profitable company after it reported a net income of $111 billion last year (twice as much as Apple) - is expected to net $10 billion for Reliance.

Markets responded positively to the news, with Reliance's share price up by more than 2% at the close of trading yesterday. In fact, Hemang Jani, the Senior VP of Sharekhan, told ET that he expected a 12-14% upside for Reliance's shares, given the benefit of securing a deep-pocketed investor for one of it's core operations.

However, discussions are still at an early stage, They follow a round of talks in December between Ambani and Khalid al Falih, Saudi Arabia’s oil minister, over potential petrochemical and refinery investments in India. Interestingly, the latter also made it to the wedding of Ambani’s son Akash last month.

The refinery and petrochemicals business is extremely important to Reliance’s bottom line, contributing three-quarters of its operating profit.

The deal makes sense for Reliance. “It is eyeing the expansion of its refinery in Jamnagar and wants to get another investor on board” says Deven Choksey, MD of K R Choksey Securities. “Reliance wants to increase the capacity of the refinery to 100 million tonnes” adds Choksey. “Hence, the investment from Aramco will strengthen its balance sheet, divide the risk and fund the addition of a new plant at the refinery”.

Furthermore, the conglomerate will likely use the proceeds from the deal to pay down its increasing debt obligations, which have ballooned to $32 billion by the end of 2018, following investments in its telecommunications business, Jio.

Aramco has also been eyeing the Indian market for a while now and the deal with Reliance will give it a stronger presence in the country’s downstream energy sector.

However, that isn’t the only investment it is weighing. Last July, Saudi Aramco and ADNOC, Abu Dhabi’s state oil firm, decided to join hands on a $44 billion refinery project in Ratnagiri, which is in the Indian state of Maharashtra.

The two state-backed oil producers are taking a 50% stake in the Ratnagiri project, which is expected to produce 1.2 million barrels per day, while the other half will be owned by a consortium of Indian refiners such as IOC and BPCL.

Sources say that Aramco is still committed to the Ratnagiri project, regardless of the outcome of deal talks with Reliance.


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