Will the subdued IPO hurt Saudi Aramco's investment plans in India?

Indian investors and policy makers are worried about the scaled down initial public offering (IPO) of Saudi Aramco as the oil giant has two major investment plans in the country -- the strategic investment in the greenfield petroleum refinery in Maharashtra and the $15 billion worth stake acquisition in the refining and petrochemicals business of Reliance Industries (RIL). Aramco, which raised $25.6 billion from the world's biggest initial public offering last week, has also been expected to participate in the proposed sale of two public sector oil marketing and refining companies -- BPCL and HPCL.

Aramco is in the primary set of negotiations with RIL to pick up 20 per cent stake in the latter's oil to chemicals (O2C) business for $15 billion. "The deal will take another 7-8 months to conclude positively," say the banking sources, who are indirectly involved in the deal. The O2C business of RIL includes the twin refineries in Jamnagar, Gujarat and the adjacent petro chemicals complex. Aramco also plans to pick up 10 per cent stake in the petroleum retail joint venture of RIL-BP Plc. The two deals together will cost Aramco Rs 1.1 lakh crore.

The deal will open up a new market for Saudi Aramco. As part of the deal, RIL will sign to buy 500,000 barrels of crude oil every day (28 per cent of the company's Jamnagar refinery requirement) on a long-term basis from Aramco. Besides, the O2C business will be a value creating proposition for both the giants as the chemical products fetches more earnings than fuels like petrol and diesel.  

Aramco and Abu Dhabi National Oil Company (ADNOC) have been planning to jointly hold 50 per cent stake in the $44 billion refinery in Maharashtra. Indian Oil Corp, BPCL and HPCL through Ratnagiri Refinery & Petrochemicals Ltd (RRPCL) have agreed to hold the rest of the stake. However, the analysts firms reported that the cost of the refinery has already escalated to $70 billion.

The refinery was initially proposed to be built at Nanar, a village in Ratnagiri district. But it has been relocated to Raigad district, about 100 km south of Mumbai because of protests from local farmers. The 1.2 million barrels a day refinery and associated petrochemical project has been projected as one of the biggest projects in the country that will bring large foreign direct investment (FDI).

The Indian government, which has a huge fiscal deficit that it intends to bridge through disinvestment of BPCL and other state assets, is looking for the participation of Aramco in the sale programme. Going by the present market value of BPCL, the buyer will have to spend at least Rs 55,000 crore ($7.7 billion) to buy government's 53 per cent stake. HPCL, which was acquired by ONGC in 2018, will be cheaper as its market valuation comes to around Rs 40,000 crore.

The Saudi Ambassador to India, Saud bin Mohammed Al Sati said in September that Saudi Arabia is looking at making investments in India potentially worth $100 billion in the areas of energy, refining, petrochemicals, infrastructure, agriculture, minerals and mining.

The aspirational IPO of Aramco has failed to fulfill the dreams of Muhammad bin Salman, the Saudi crown prince who planned the sale to raise capital for investments in the kingdom's future business. He expected the investors to swoon over the company's rich reserves, low costs and $111bn in annual net income. He wanted to sell a 5 per cent stake for $10 a share, raising $100 billion and valuing the company at $2 trillion. But a survey by Bernstein Research of 31 major global investors found that the average valuation they put on Aramco was just $1.26 trillion -- which comes to around $6.30 a share. Finally, Aramco managed to get an IPO price of $8.53 after restricting the number of shares up for sale. The oil giant sold 1.5 per cent stake and raised just over $25 billion. According to the IPO price, Saudi Aramco is valued at $1.7 trillion, ahead of Apple Inc. and Microsoft Corp -- both are worth around $1.2 trillion each.

Also read: Saudi Aramco raises $25.6 billion in largest-ever IPO

Also read: Reliance Industries' deal with Aramco: Mukesh Ambani wants chemicals to dominate Jamnagar refinery output