Reliance Industries O2C spinoff impact!
Last updated: 24 Feb, 2021 | 11:23 am
Details of the Spinoff
- Reliance Industries is carving out its Oil-to-Chemicals (O2C) business into an independent subsidiary. This business will constitute refining, petrochemical and fuel retailing businesses.
- Post reorganisation, Reliance Industries will continue to retain management control.
- The proposed reorganisation of its O2C business will not result in any change in the shareholding structure in the company.
- RIL will be transferring long-term assets to the O2C vertical, in return for a loan of $25 billion. The O2C business will pay floating rate interest linked to one-year SBI MCLR rate. The loan to the O2C business will be paid as and when the strategic investors come in.
- The existing O2C operating team will move to the newly created subsidiary with the transfer of business. There will be no dilution of earnings or any restriction on the cash flows, according to RIL.
- The company expects all approvals to complete by the end of September 2021.
Rationale for the Spinoff
- Splitting the business will make it easier for Reliance Industries to bring in strategic investors. It will also help to catalyse proposed stake sale to Saudi Arabian Oil Co.
- Over the last few years, the company’s consumer businesses Reliance Retail and Reliance Jio have been growing at a very fast pace. The consumer-facing businesses of telecom and retail now contribute to more than 50% of total EBITDA (in Q3FY21).
- The move to merge the refining and petchem businesses, coupled with its net cash status, may attract investments in the O2C business as well
Action by brokerages
Nomura maintains buy
Nomura said that after the O2C demerger, the company’s focus will shift to Green Energy. The demerger is unlikely to affect the consolidated financial statements. Nomura has a 'buy' call on the stock with a target at Rs 2,400 per share. It expects a 33% compound annual growth rate in the firm's earnings over FY20-23.
Morgan Stanley remains Overweight
- With this reorganization, Reliance Industries will have four growth engines including digital, retail, new materials and new energy, according to Morgan Stanley.
- While the market appreciates the value for the first two businesses, Morgan Stanley sees significant upside risk to earnings and multiples for O2C as RIL invests in new energy/technology. ). The company expects valuations/asset prices to rebound back to levels seen in Aug-19 with a much improved industry outlook.
Moody’s expects a faster stake sale
- RIL’s separation of its O2C business to a subsidiary will facilitate a potential stake sale to Aramco, possibly enabling a further reduction in its net debt, Moody’s said.
- Until the stake sale is completed, there will be no subordination risk for RIL’s lenders, as the company will continue to have full access to the O2C business’ cash flows, given its full ownership of and no external debt at the new subsidiary, noted the agency.
Macquarie maintains Underperform
- Macquarie feels that this spinoff sets the stage for stake sale in O2C business. However, the brokerage expects RIL’s earnings in FY22-23 to be 25% below consensus estimate.
- According to the firm, today’s stock price implies flawless execution on RIL’s multi-pronged growth aspirations, combined with a premium over recent deal valuations. It has maintained an Underperform rating with a target of Rs 1,350.