RIL announces demerger of oil-to-chemical business ahead of Aramaco deal

Reliance Industries Limited (RIL) on Tuesday 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 will hold a 49.14 percent stake in the O2C business after the reorganization. The O2C business will be a 100 percent subsidiary of RIL.

The company is eyeing mega deals, including one with oil giant Saudi Aramco. Experts believe that the announcement of the demerger of O2C business was done in the run-up to negotiations with Aramco. The talks were paused last year due to COVID-19.

As per 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, said: “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 stated 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 stated: “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.

“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,” stated the Morgan Stanley report.

Disclosure: Network18, the parent company of CNBCTV18.com, is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

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