Mukesh Ambani-led Reliance Industries has set the ball rolling for an important internal recast, which involves the demerger of its cash cow oil-to-chemicals (O2C) business into an independent subsidiary, as India's most valuable firm looks to unlock value for shareholders and embrace new-age businesses to boost growth in the next decade.
The move comes at a time when there is a global clarion call for a shift to sustainable energy and follows a blitzkrieg of fundraising in a pandemic hit 2020 when RIL raised a whopping $27 billion for its digital and retail verticals to deleverage its balance sheet. Below is an account of the significance of the move, answering some vital questions.
WHAT'S THE TRIGGER FOR THE CARVEOUT?
The creation of a separate arm housing the O2C business with a dedicated management team sets the stage for the induction of strategic global investors who are keen to tap the massive Indian market, which is still seen as a growth hub for the next decade with Europe shrinking.
Sitting at the top of that pile of potential investors is the world's largest oil exporter—the Middle East giant Saudi Aramco. In August 2019, the oil-to-retail conglomerate announced plans to divest a 20 percent stake to Aramco in the O2C business at an enterprise value of $75 billion.
After briefly hitting a pause button due to the pandemic, talks between both parties are believed to be back on track.
RIL, which has seen a recovery in its petrochemical margins and refining business, plans to gradually reduce its carbon footprint and be net carbon zero by 2035. The O2C business is looking to invest in next-generation carbon capture and storage technologies to convert CO2 into useful products and chemicals.
These plans are in sync with the vision of Saudi Aramco, which wants to diversify its energy mix and emerge as a force to reckon with in clean energy. The tone was set at the recent annual Davos gathering where many global industrial powerhouses pledged their allegiance to a set of ESG (Environmental, Social, and Governance ) goals.
"New-age investors will chase new-age businesses. The group has many different businesses right now and getting the right global investor subset for the right business is critical, hence this move. RIL's cost competitiveness in the 02C segment is mind-boggling and this will continue to be a powerful, cash-generating vertical for them," says an industry observer, who has closely tracked the group for over a decade, requesting anonymity.
WHAT WILL A NEW INVESTOR GET IN THE O2C BIZ?
RIL is widely respected for its prowess at backward integration and is arguably the only company globally with integration from oil to polymers, chemicals, polyesters, and elastomers. The O2C business has high-quality, technologically advanced assets and boasts of the largest single-site crude refinery complex globally. RIL is also the largest petcoke gasifier globally, the largest global producer of PX (para-xylene), and has 12 manufacturing facilities in India and three in Malaysia.
The O2C business also includes a 51:49 joint venture with British Petroleum (BP) that includes a retail service station network and aviation stations. The plan is to hit 5,500 retail outlets in the next five years from the existing portfolio of around 1,400 outlets.
Importantly, according to the official announcement, management control of the O2C business will continue to remain with RIL and the firm expects regulatory approvals for the demerger (which will not impact its consolidated financial position) to be secured by Q2FY22. The deal will result in O2C cash flows optimized to fund its own growth along with efficient upstreaming of cash to RIL.
DOES THIS PAVE THE WAY FOR A NEW-LOOK RIL?
Yes. Looking ahead, RIL is betting on four high-growth engines to drive value creation. Firstly, the O2C business where it expects growth from high-value downstream chemicals and materials. Secondly, Digital (which includes Jio) where connectivity and scaling up of digital platforms will be key. Thirdly, Retail where consumer-led growth will look to leverage technology and an omni-channel presence and finally New Material & Energy, which will focus on clean, green and affordable energy.
The fourth growth pillar i.e clean energy is critical as back in September 2019, at the United Nations Climate Action Summit, India had hiked its renewable energy target to 450 GW by 2030 from 175 GW by 2022.
The clear demarcation of separate growth engines is also being perceived on the street as a step towards eventual succession planning by Mukesh Ambani, especially with Isha, Akash and Anant, heirs to the Reliance empire, already taking up various roles at group companies.
Reliance Jio and Reliance Retail, which are backed by marquee investors ranging from Facebook and Google to KKR & Silver Lake are believed to be candidates for blockbuster IPOs in the next two to three years.
WHAT'S THE MARKET FEEDBACK?
The markets gave a thumbs-up to the demerger roadmap as the RIL stock perked up in early trade on February 23.
A brokerage note by Morgan Stanley titled: "The Decade Ahead -II: Green RIL" said, "RIL's demerger plan for Oil to Chemicals (O2C) business is a step towards monetisation and acceleration of its new energy and material 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."
Out of a 10-year capital outlay of $50 to $60 billion, Morgan Stanley expects new energy (Renewable/Battery/other fuels) to bag $13 billion to $15 billion, digital to get $12 billion -$15 billion, followed by retail at $12 billion-$14 billion, chemicals at $8.5 billion to $10.5 billion and finally plastic recycling to get $0.5 billion to $1.5 billion.
RIL 2.0 in the making? Undoubtedly, yes!
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