The Mukesh Ambani-led Reliance Industries (RIL) juggernaut is on a roll. After having carved out the telecom and retail businesses into independent subsidiaries, now it’s the turn of the traditional businesses to be rejigged. The cash-rich oil-to-petrochem behemoth, founded by Dhirubhai Ambani in 1973, is in the process of remoulding the fundamentally-strong old businesses and establishing an oil-to-chemicals subsidiary, Reliance O2C.

RIL will soon turn into a holding company of the group. What will be left in the holding company would be the upstream oil and gas exploration business, including the KG-D6 block; financial services; centralised treasury; and the international trading division and textile businesses.

The consent process for setting up a wholly-owned subsidiary is likely to be completed by the first quarter of 2021-22. The markets regulator, the Securities and Exchange Board of India (Sebi) has already given a go-ahead, and the National Company Law Tribunal (Mumbai) has admitted a company scheme application (CSA) filed by RIL on February 11. The NCLT nod is expected before September 30.

After having created two growth engines with Jio and Reliance Retail, RIL is building the third one—Reliance O2C. Plans are afoot to accelerate the creation of the fourth engine too—the new energy and new materials business, which will span RIL’s activities in the clean and green energy sectors.

According to a presentation made by RIL on February 23, the reorganisation creates an independent, global scale growth engine for the company, with strong cash flow generation potential. Stock analysts believe the rejig will not have any impact on RIL’s consolidated financials, and its credit rating. “We do not see the reorganisation impacting consolidated financials and RIL had $5 billion of net debt and $11 billion in non-current liabilities including spectrum, creditors, amongst others, as of January 2021,” says Morgan Stanley, a global brokerage firm, in its research note.

Once established, Reliance O2C will have the largest and most complex single-site refinery at Jamnagar with 1.4 MMBPD crude refining capacity, vertically integrated portfolio across petrochemicals value chain, among the lowest cost positions, and global top 10 rankings in key products. In 2019-20, RIL’s petrochemicals production stood at 38.4 MT.

RIL was engaged in talks with Saudi Aramco for one of the largest downstream transactions in India. RIL first announced that it was in talks with Aramco to sell a stake in its O2C business in August 2019. The plan was to divest a 20% stake in the O2C business at an enterprise value of $75 billion. Subsequently, the company announced a detailed plan to create a separate entity for the business in September 2020.

The new subsidiary will also house the 51:49 fuel retail JV with BP, having an enterprise valuation of $2 billion. Other key assets will include all assets in ethane gasification, including storage tanks at the Dahej manufacturing division, but excluding ethane vessels. All the storage tanks and trading offices at major oil trading hubs and real estate assets relating to operating manufacturing sites, retail stations and country fuel depots, and offices of the subsidiary will come under Reliance O2C. Similarly, all rights, contracts and licences for operations and marketing of the O2C business, including captive technologies, brands, trademarks, and intellectual property will shift to the subsidiary. All employees employed exclusively in the O2C businesses will move to the new subsidiary.

O2C will also comprise of some other subsidiaries—RIL USA, Inc. (a trading subsidiary), Recron (Malaysia) Sdn. Bhd. (which manufactures polyesters and textiles in Malaysia), RP Chemicals (Malaysia) Sdn. Bhd. (which manufactures PTA in Malaysia) and Reliance Petro Marketing Ltd (which includes the LPG and lubricants business).

In a nutshell, the O2C business will encompass the entire gamut of refining, petrochemicals, aviation fuel, and wholesale marketing. It also includes a wide portfolio spanning transportation fuels, polymers, polyesters, and elastomers. The unique integration of the O2C business will bring RIL’s world-class assets comprising refinery off-gas cracker, aromatics, gasification, multi-feed and gas crackers, along with downstream manufacturing facilities, logistics, and supply-chain infrastructure.

Deven Choksey, managing director of KRChoksey Shares and Securities, told Fortune India that it is a good move on the part of the RIL management. “Basically, these businesses operate in very different sectors. Individually, each one can grow much faster and easier,” said Choksey.

A Mumbai-based stock analyst said there is no change whatsoever for the investor as of now. “It is just a separation of assets into a subsidiary in a slump sale format,” he said.

Morgan Stanley said that RIL’s de-merger plan is a step towards monetisation and acceleration of its new energy and materials plans into batteries, hydrogen, renewables, and carbon capture—all of which point to the next leg of multiple expansion and clarity on the next investment cycle. “The reorganisation will lead to RIL carving out the O2C business as a separate subsidiary and support strategic partnerships and new investors in the business,” it said in the research note.

“For the first time, RIL has highlighted more details on key pillars to achieve their target. While most plans were in line with our expectations of investments in renewables, hydrogen, batteries, niche chemicals/materials and focus on recycling/circular economy, the focus to use/capture CO2 stood out and implies carbon capture investments ahead,” said Morgan Stanley.

It has however cautioned “significant upside risk to earnings and multiples for O2C” as RIL invests in the new energy/technology.

RIL hopes the new subsidiary will facilitate participation by strategic and financial investors for value discovery and unlocking. There will be more potential for re-rating and sustainable value creation.

On the flip side, key liabilities of Reliance O2C include all trade and other related payables in relation to the subsidiary, and the loan from RIL against consideration for transfer of the O2C business. RIL will provide a loan of $25 billion at a floating interest rate to Reliance O2C which will have assets worth around $42 billion, accounting for around 28% of the company’s consolidated assets.

As of December 2020, RIL’s gross debt stood at ₹2.57 lakh crore compared to ₹3.36 lakh crore in 2019-20. Around half of it is accounted for by the O2C subsidiary.

The transfer of assets to the wholly-owned subsidiary will be tax neutral for RIL. The company believes the loan, long-dated with flexibility to structure repayments, will ensure an efficient mechanism to upstream cash, including any potential capital receipts in O2C. The subsidiary will pay floating rate interest linked to the one-year SBI MCLR rate. Total assets and liabilities (of RIL’s standalone balance sheet) will stand at $89 billion while on consolidated RIL balance sheet, total assets and liabilities will stand at $152 billion.

Morgan Stanley believes how RIL allocates the $125 billion growth capital it generates this coming decade will be key for investors looking beyond the near term. “If a third of the investment comes via partnerships, RIL would be free cash flow (FCF)-positive despite the capital outlay,” it adds.

To give comfort to its lenders, the cash balance of the group will remain with the parent, RIL. The company was sitting on cash and cash equivalent of ₹2.20 lakh crore ($30.2 billion) at the end of the December 2020 quarter against ₹1.75 lakh crore ($23.2 billion) at the end of March 2020.

RIL is all set for an exciting journey ahead.

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