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RIL Announces the Demerger of Its O2C Business

Mar 2, 2021 5:57 PM 4 min read

In a late-night filing, Reliance Industries Ltd (RIL) announced the demerger of its oil-to-chemicals (O2C) business into a wholly-owned subsidiary.

The conglomerate has already received approval from SEBI and stock exchanges for hiving off Reliance O2C. It is now seeking consent of the NCLT, shareholders and creditors. All in all, RIL expects the approval process for this hiving off to wind up by Q2FY22.

A Petro-Tsar is Born

The proposed new entity would control all of RIL’s refining, marketing and petrochemical assets and be funded by a $25bn interest-bearing loan from the parent. The 100% subsidiary would also be given control of fuel retail (51:49 JV with BP) and global subsidiaries of its parent.

RIL, meanwhile, would keep the upstream exploration and production business, financial services, group treasury and the legacy textile businesses, and act as a holding company of the Group. According to Fitch, the demerger should have no impact on RIL's credit metrics and ratings.

FYI: RIL’s other major businesses - telecom and retail - have already been spun off into their own entities. Jio Platforms and Reliance Retail Ventures respectively.

According to a company presentation (link), the move is aimed at unlocking new growth opportunities and attracting “high quality strategic partners and capital”. While “capital” may not be as high a priority for the conglomerate as it was a year ago - thanks to the stake sale spree it was on in 2020 - the “strategic partners” bit may have to do with Saudi Aramco, the world's largest oil exporter, with whom talks appear to be ongoing for one of the largest downstream transactions in India.

FYI: Reorganising its O2C business as a separate entity would also mean louder calls for transparency. In its Q3FY21 earnings report, RIL for the first time did not disclose its Gross Refining Margins (GRM), a key metric that highlights the margin earned on every barrel of oil processed. Analysts opined that doing so might have hidden the true impact of the pandemic on RIL’s numbers due to reduced topline (due to low demand). Now with demand recovering but higher refining input costs (explanation: crude oil prices are headed up), GRM would be under more pressure than ever.


How Big Would Reliance O2C Be?

Very big. It would have a refining capacity of 1.4 million barrels per day and petrochemical production capacity of 38.4 million tonnes. It would house nine manufacturing units in India and three in Malaysia - not to forget the oil refinery at Jamnagar, one of the world’s largest.

In monetary terms, the O2C business remains the conglomerate’s biggest cash cow despite the COVID-19 demand dip. It commands 60% of RIL’s consolidated revenue and 40% of its total operating profit at $40bn and $4.9bn respectively (April-December FY21 data). The total assets of the O2C entity are worth ₹3.6Lcr ($49.7bn), around 28% of RIL's total assets as of Q3FY21.


The Aramco Factor

Discussions between RIL and Aramco began in 2019 for a 20% stake in the former’s O2C business at an enterprise value of $75bn. A deal was to be concluded by March 2020 - only to be delayed by the COVID-19 pandemic. Now negotiations are back on the table but the dynamics have changed. The O2C vertical having slated to become its own ring fences it from the $33bn raise of 2020 which muddled its valuation, leading to talks dragging down earlier.

That’s not to say Aramco may be less inclined to buy a stake. The oil major has been on a mission to increase its global footprint, buying stakes and entering into joint ventures in large companies in countries like South Korea, Malaysia and China. India, with its large domestic market, is an obvious catch. Moreover, the incoming EV revolution that may hamper Aramco’s long-term prospects and the resultant fall in demand in crude are expected to play out relatively slowly in India.


Going Green

The Aramco angle may have propelled RIL’s decision to create an O2C subsidiary, but that’s just one part of the story. Reliance O2C may create opportunities to accelerate RIL’s New Energy and New Materials aspirations and help the firm reach its goal of becoming "net carbon zero" by 2035.

Chairman Mukesh Ambani intends to make a major shift in the direction of clean and affordable energy in addition to cultivating a portfolio of advanced and specialty materials and transitioning to a hydrogen economy. Morgan Stanley predicts that RIL will invest $13-15bn in new energy in the next decade - more than the amount it is expected to invest in its digital, retail and chemicals arms.

The conglomerate also has a goal of turning carbon neutral (i.e. achieving net zero carbon dioxide emissions) in the next 15 years. This doesn’t mean it will abandon its crude operations altogether, but that it will offset the same with investments in green energy, waste recycling and carbon footprint-reducing technologies.


The Bottom Line

Reliance’s over-reliance on its energy business has been something the company has been working hard to shed in recent years. To this end, it has been piling investments on its other verticals, most notably telecom and retail. In both instances, the bet seems to be paying off. Jio is now the country’s largest mobile network operator, with over 400 million subscribers. And Reliance Retail, launched only a few months ago, is already disrupting India’s booming online grocery sector.

Reliance O2C could do for RIL what Reliance Retail Ventures and Jio Platforms have been doing: attract abundant capital and become big enough for a possible listing. The move could also be a precursor to a deal with Aramco and could help the country’s most valuable company to divert attention to newer (and greener) growth engines.


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