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Saudi Aramco to pick up 20% in a to-be-carved out oil-to-chemicals business for $15 billion; funds to help write down debt to zero in two years’ time

All in the family: RIL CMD Mukesh Ambani with wife Nita Ambani and mother Kokilaben at the company’s annual general meeting in Mumbai on Monday. Vivek Bendre

The world’s largest oil producer, Saudi Aramco, has agreed to pick up 20% stake in Reliance Industries Limited’s (RIL) oil to chemicals (O2C) business at an enterprise value of $75 billion in one of the largest foreign investments in India.

Both companies have signed a non-binding Letter of Intent (LoI) regarding a proposed investment in the O2C division, comprising the refining, petrochemicals and fuels marketing businesses of RIL.

“RIL’s Oil to Chemicals (O2C) division will be carved out of the company, in which Saudi Aramco will hold 20% stake for $15 billion on a zero-debt basis and it will operate as a joint venture. The value of the deal will change if the JV assumes debt.

“Aramco has the option to increase its stake in JV and will get a board seat, once the deal is done. Both RIL and Aramco will decide to list the JV in coming years,” said a person in the know of the development.

At the company’s 42nd AGM, Mukesh Ambani, chairman and managing director, RIL, told shareholders, “Since its inception, our Jamnagar refinery has been processing Saudi oil every single day for 20 years. Now, we have transformed our long-standing relationship of two decades into a partnership [that has] growth potential, for many more years.”

This comes at a time when RIL’s consumer facing businesses — Reliance Jio and Reliance Retail — are now contributing to over 32% of the company’s earnings before interest, tax, depreciation and amortisation (EBITDA), compared with just 2% five years ago. The contribution from the consumer facing businesses are likely to exceed 50% of RIL’s EBITDA in the coming years.

As part of the deal, Saudi Aramco will also provide 5 lakh barrels per day (bpd) of crude supply to RIL’s twin refineries in Jamnagar on a long-term basis. The deal will also include RIL’s fuel retailing business in which British oil major BP has bought 49% stake for ₹7,000 crore.

“This partnership will cover all of RIL’s refining and petrochemicals assets, including 51% of the petroleum retail JV,” Mr. Ambani said.

The investment by Saudi Aramco is subject to due diligence, definitive agreements, regulatory and other customary approvals. The move will help the Indian firm, which has the highest debt outstanding in the country, to deleverage considerably. RIL’s outstanding debt as on June 30 stood at ₹288,243 crore compared to cash and cash equivalents of ₹131,710 crore.

‘May improve sentiment’

“Market is going to heartily welcome the seminal announcement by India’s largest company. This is India’s largest-ever FDI inflow and would help dissipate the gloomy sentiment currently pervading in the economy and stock markets,” said Ajay Bodke CEO, PMS, Prabhudas Lilladher.

RIL’s O2C business posted revenue of ₹5.7 lakh crore, recorded exports of ₹2.2 lakh crore and saw EBITDA of ₹52,041 crore in the last fiscal. The company processed 68.3 million tonnes of crude that year with gross refining margins of $9.2 per barrel.

More than 80% of the Indian Tea Association members incurred losses in 2018-19

Days after the Indian Tea Association (ITA) sent a distress signal through newspaper advertisements, the Centre has called for a meeting of all stakeholders to discuss issues pertaining to the sector.

The ITA, the apex industry association — accounting for a majority of the tea produced in the organised sector — had inserted an advertisement, highlighting the crisis and seeking government intervention.

More than 80% of the ITA members, with estates in Assam and West Bengal, had incurred losses in 2018-19 and were preparing for losses during the first quarter of this fiscal.

“Most of our members (nearly 251) are in losses,” a senior ITA official told The Hindu.

A reading of the published results of the listed companies shows that in most cases the losses had widened since 2017-18. These firms belong to industry houses such as Williamson Magor, a heritage company, the Birlas, Bangurs, the Goenkas, Tata Group and another heritage organisation in the public sector, The Andrew Yule Group.

The long list includes McLeod Rusell, Warren Tea, Andrew Yule, Jay Shree Tea, Associated Plantations Pvt. Ltd. and Joonktollee Tea & Industries to name a few.

Many of these companies have also suffered rating downgrades.

The red streak runs across the country’s tea-growing regions in the north and the south. The main reason cited by the managements of these companies as also the industry captains has been the stagnation in the average selling price of tea.

While the costs have ballooned to almost ₹200 per kg, the average selling prices have remained flat at about ₹160 per kg between 2013-14 and 2018-19,

The industry also feels that production needs to be regulated in order to boost prices. “The unhealthy demand-supply situation is one of the main reasons for stagnating prices,” said Vinay Goenka chairman, ITA and executive chairman, Warren Tea.

However, sector experts felt a section of the industry, too, had failed. “One major reason is that this industry failed to reinvent itself and continued with the same old cultural practices and selling procedures similar to what was being done 100 years ago,” said N. Laxmanan, a senior Nilgiris tea planter.

Firm to look at value-unlocking in real estate, investments

Mukesh Ambani is trying to hit two birds with one stone through the value-unlocking exercise across RIL’s businesses, in which he had invested over ₹5.4 lakh crore in the last five years, of which ₹3.5 lakh crore has been invested in Reliance Jio alone.

The company will also evaluate value-unlocking options for its real estate and financial investments.

In the coming years, RIL will be selling a significant minority stakes in its consumer-facing businesses on the lines of the Aramco deal to deleverage its balance sheet, which is a concern among the investors. India’s richest man also announced the most-awaited launch of Jio Fiber on September 5, offering customers free calls for life, LED TV, set-top box and ‘first-day-first show’ movies in their living rooms.

In his speech titled ‘New Reliance for a New India,’ Mr. Ambani said, “On the strength of our existing and new growth engines, I am confident that we can grow this by 15% annually over the next five years.”

“Responding to the honourable PM's appeal, we stand committed to support the people of Jammu & Kashmir and Ladakh in all their developmental needs.”

Rewarding shareholders

On becoming a net zero-debt company, Mr. Ambani assured that he would reward shareholders through higher dividends, periodic bonus issues and other means, and at a more accelerated pace.

Anticipation arises after the public sector lender dropped rate to 8.3%, one of the lowest in the industry, after linking it with RBI’s repo rate

Cheaper homes: The public sector lender expects to end the financial year with a 20-24% growth in home loans.

Public sector lender Syndicate Bank is hoping that home loan customers of non-banking finance companies (NBFCs) will switch over to the bank.

The expectation comes after the bank had linked its home loan rate to the Reserve Bank of India’s (RBI’s) repo rate, leading to a drop in the interest rate to 8.3%, one of the lowest in the industry. “We are hoping that a good chunk of the current performing housing loans from NBFCs will migrate to us. Their home loan rates are much higher,” Mrutyunjay Mahapatra, MD & CEO of the bank, told The Hindu in an interaction.

Till now, only three lenders have linked their home loan rates to the external benchmark, that is the repo rate. While the State Bank of India (SBI) had linked home loans to the repo rate with effect from July 1, Syndicate Bank and Bank of Baroda have decided to take the same route now.

Syndicate Bank’s home loan starts from 8.3%, while for Bank of Baroda, it is 8.35%. At present, SBI’s repo-linked home loan rate starts from 8.4% which will come down to 8.05% from September when the latest cut in repo rate will be factored in. At HDFC, one of the country’s largest mortgage lenders, home loan rates start from 8.60% (8.55% for women borrowers).

Mr. Mahapatra said the trigger for such a move was the last week’s 35 bps repo rate cut by the RBI and the central bank’s emphasis on monetary transmission.

Rate transmission

“[The] RBI was expressing concern over why the interest rates were not getting transmitted. So, we were doing our internal calculations. The immediacy of the step came after the 35 bps rate cut [by the RBI]. During the speech, the RBI Governor mentioned that the transmission must happen. Also, right now, the economy needs a boost,” he said.

The bank now expects home loan growth to improve with lower rates. Till the first quarter, growth in home loans for the bank was about 8% year-on-year and now, it expects to end the financial year with 20-24% growth.

Mr. Mahaptra said they were also asking builders to offer discounts to boost sales. “Festive season, unsold inventory could boost demand. We are asking builders to give some discounts rather than holding on to stocks,” he said.

Apart from home loan rates, Syndicate Bank had also linked the deposit rates (for deposits over ₹25 lakh) to the repo rate. Mr. Mahapatra said this was to maintain some parity in deposit and lending rates.

“The market wants the deposit [rates] to remain high and transmission to happen only in lending rates. But that is unsustainable. So, we decided to bring about some amount of parity in the movements of deposit rates and lending rates,” he added.

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