Ebene Magazine – RIL restructuring to ease Aramco deal, unlock next leg of up move: Analysts en

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Ebene Magazine - RIL restructuring to ease Aramco deal, unlock next leg of up move: Analysts en

Nikita Vashisht  | 
New Delhi 
Last Updated at February 23, 2021 09:46 IST

Mukesh Ambani-owned Reliance Industries’ (RIL’s) proposal to carve-out oil-to-chemicals (O2C) business into an independent subsidiary is a step towards monetisation and towards the next leg of multiple expansion, say analysts.

In a late night announcement on Monday, RIL said it plans to reorganise its O2C business and make it a separate entity that will be 100 per cent owned by RIL. In a presentation to investors, the company stated that it is looking at completing the process by FY22.document.write(« « );googletag.cmd.push(function(){googletag.defineOutOfPageSlot(‘/6516239/outofpage_1x1_desktop’,’div-gpt-ad-1490771277198-0′).addService(googletag.pubads());googletag.pubads().enableSyncRendering();googletag.enableServices();});

RIL, the investor presentation said, will focus on new energy and new materials business “towards its vision of clean and green energy development.” The company also plans to develop or introduce new technologies to reduce carbon footprint for O2C business and plans to achieve net carbon zero by 2035.

It further added that while RIL and O2C business will become two different entities, the company ensures that both will have « close interplay”.

“With this reorganization, RIL will have four growth engines – digital, retail, new materials and new energy. While the market appreciates the value for the first two businesses, we see significant upside risk to earnings and multiples for O2C as RIL invests in new energy/technology,” notes Mayank Maheshwari, equity analyst at Morgan Stanley in a report dated February 23.

One of the key upsides that analysts see from the proposed deal is smooth stake sale to Saudi Aramco, which has been in the works since the past few months, reports suggest. “Key benefit from the deal is that reorganization of O2C would ease out its stake sale into the unit to strategic investors like Saudi Aramco and others. In line with Reliance Retail Ventures and Jio Platform stake sale, we expect it to pare 20-25 per cent stake to strategic investors, which would unlock huge value to its shareholders,” said a note by IDBI Capital.

Media reports suggest that talks have restarted on a potential stake sale in RIL’s O2C business to Saudi Aramco (announced in August 2019). Morgan Stanley now sees valuations/asset prices rebounding back to levels seen in August 2019 with a much improved industry outlook which may push the deal ahead.

Analysts expect the refining, petrochemicals, fuel retail joint venture (JV) with BP and trading operations to be in the O2C business, which would be 100 per cent subsidiary of RIL. Further, the conglomerate will provide a loan of $25 billion to O2C subsidiary at floating interest rate with the subsidiary having nearly $42 billion of assets, i.e. 28 per cent of consolidated assets.

O2C businesses contributed 60 per cent/68 per cent to RIL’s consolidated revenue in 9MFY21/FY20 and 38 per cent/53 per cent to its Ebitda during the same period. About 71.4 per cent of total gross borrowings of $35 billion stand for O2C business (US$25 billion). Moreover, total equity contribution stands at $12 billion in O2C and its total balance sheet size is $42 billion (consolidated $89 billion).

In this backdrop, Maheshwari of Morgan Stanley does not see the reorganization impacting consolidated financials as RIL had $5 billion of net debt and $11 billion in non-current liabilities including spectrum, creditors amongst others as of Jan-21.

“How RIL allocates the $125 billion growth capital it generates this coming decade will be key for investors looking beyond the near term, in our view. If a third of the investment comes via partnerships, RIL would be FCF-positive despite the capital outlay,” the Morgan Stanley note said.

Ambareesh Baliga, an independent market analyst, meanwhile, highlights that while the proposed restructuring is ‘in no way de-merger with the mirror shareholding’, it makes RIL a holding company.

“Now, investors need to see how RIL’s valuation may change with respect to other listed subsidiaries as they are trading at a steep discount,” he explains.

Morgan Stanley maintains an ‘overweight’ rating on the stock with a target price of Rs 2,252 while IDBI Capital has a ‘Buy’ call with a target price of Rs 2,475. The stock gained over 1 per cent on Tuesday following the development to Rs 2,033 levels.

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