RIL Opts for Demerger of Oil-to-Chemical Biz Prior to Aramaco deal

Reliance Industries Limited (RIL) has announced the demerger of its oil-to-chemical (O2C) business. It is carving out its O2C business into an independent subsidiary, the company said in a notification to exchanges.

RIL said that the promoter group would acquire a 49.14 percent stake in the O2C business after the reorganization. The O2C business would be a 100 percent subsidiary of RIL.

The company is eyeing mega deals, that include one with oil giant Saudi Aramco. Experts believe that the announcement of the demerger of O2C business has been carried out in the run-up to negotiations with Aramco. The talks were put on hold last year due to COVID-19.

According to the reports, talks have restarted with Aramco. The world’s largest crude oil exporter is in the process of picking up a 20 percent stake in RIL’s O2C business.

Commenting on RIL’s announcement to transfer its O2C business to a separate subsidiary, Sweta Patodia, Analyst, Corporate Finance Group, Moody’s Investors Service, says, “RIL’s separation of its O2C business to a subsidiary will facilitate a potential stake sale to Aramco, possibly enabling a further reduction in RIL’s net debt. 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.”

A report by Morgan Stanley revealed that the demerger plan was a step forward towards monetization and acceleration of new energy and material plans into batteries hydrogen, renewables and carbon capture.

The report reveals, “While most plans were in line with our expectations of investments in renewables, hydrogen, batteries, niche chemicals or materials and focus on recycling economy, the focus to use CO2stood out and implies carbon capture investments ahead.”

The report also added that with this reorganization, RIL will have four growth engines — digital, retail, new materials and new energy.

Furthermore, the Morgan Stanley report states, “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.”