In a briefing note following Reliance chairman Mukesh Ambani’s announcement at its AGM in Mumbai, David Cornell, chief investment officer at Ocean Dial Asset Management, points to the ‘bullish’ Indian energy industry in the wake of Aramco’s purchase of Reliance Industries’ refining and petrochemicals business.
“Whilst offering obvious benefits to Reliance as it makes steps to deleverage its balance sheet, and to Saudi Aramco as they broaden their exposure to one of the world’s biggest oil importers, India’s economy is also poised to benefit”, he says.
“Market sentiment in India has been fairly low in the months following the election and foreign institutional investors have been withdrawing funds as they wait to see a reversal in economic slowdown. The announcement should inspire some much-needed confidence as it brings with it the prospect of India’s largest ever FDI inflow.
“This announcement comes just a few days after BP and Reliance agreed to a joint venture to increase their market share and almost quadruple their current network of fuel stations in India in the next five years. Even with a shift in global demand away from fossil fuels, India continues to be a growth area for oil as the western world starts to look to cleaner sources.”
He continues: “However, this partnership will offer a strong foundation for Reliance should it look to develop charging infrastructure for electric vehicles as this market continues to grow.
“Whilst we are not currently invested in the stock, these high-profile deals all help to enhance the visibility of Reliance and India’s energy sector on a global platform. The Jamnager refinery produces predominantly for export which should help offset the 500,000 barrels of crude that it is expected to import from Saudi Aramco daily. This will help manage concerns over the associated risks of heightened inflation and an increase in the current account deficit.
“Mukesh Ambani has set the goal of becoming debt-free in 18 months. Whilst the Saudi Aramco deal will certainly help to deleverage, attention will now turn to Reliance Jio, the telecoms side of the business, as it rolls out its plans for fiber broadband and readies itself for the anticipated 5G auction.”
He adds: “These ventures will require a significant level of investment; it will be interesting to see how Ambani plans to fund these and whether we can expect to see additional sell-offs from the company in the future.
“However, it is clear that Reliance is making steps to becoming a consumer centric business with the introduction of high-speed broadband and the expansion in retail fuel stations. Whilst the Saudi Aramco deal does not directly feed into the consumer side, it should help to enable this move that will boost investor confidence and promote growth.”
‘No stone unturned’
This news comes a day after Prime Minister Narendra Modi asserted that his government will “leave no stone unturned” to make India a better business destination, with the vision of his government over the next five-years to have investment-led growth, working on policies to promote inflows domestically and foreign in pursuit of a $5trn economy.
David Cornell is of the view that now is a truly exciting time for investors in India under Modi’s business-friendly leadership. However, he also recognises that there are several non-political factors that underpin the nation’s appeal to international investors.
For example, the country has favourable demographics with half of the population under the age of twenty-five and an increasingly small population of young and old dependents. This falling dependency ratio is expected to drive demand in the consumer markets, supporting a growing B2C (Business-to-Consumer) sector as well as driving GDP growth.
Ocean Dial runs the India Capital Growth Fund, a London-listed investment company that predominantly invests in listed mid and small cap companies.