A fall in crude price and Aramco’s US$75bn annual dividend commitment have delayed the RIL O2C stake buy in our view. The company recently reiterated its focus on downstream investments in India and China. It could replicate its downstream investment model in China by an investment in RIL’s O2C business. RIL would benefit from lower leverage and lower carbon footprint. Reiterate ‘buy’ on RIL.
Expansion in India: Aramco’s IPO prospectus mentioned it’s focus its downstream investments in high growth economies of China, India and Southeast Asia. Recently, CEO reiterated India focus: CEO Amin Nasser in a Dec-20 interview said that while short term adjustments were necessitated by low crude price, they continue to pursue opportunities in high-growth markets of India and China. He is targeting oil to chemical (O2C) investments in India and China and expects strong growth in chemicals in India.
Existing China footprint: Aramco has an equity stake in China’s largest O2C project at Zhejiang with a long-term crude supply agreement and a plan to build a network of retail outlets. It also has a fuel retailing JV with Sinopec operating 1,000 retail outlets.
A similar footprint possible in India: An investment in RIL’s O2C subsidiary could give Aramco a similar footprint-a stake in India’s largest O2C project with a long term crude supply agreement and a participation in fuel retailing via the RIL-BPJV. Since it did not go about setting up green-field O2C capacity in China and no other Indian player is considering a O2C transition, an investment in RIL’s business appears a logical option.