Reliance Industries\u2019 (RIL) announcement last week hiving-off its Oil to chemicals business into a separate subsidiary is the third and final stage of company\u2019s restructuring. The hiving-off is important not only from a re-alignment perspective but also because Oil & Petrochemicals sector is facing considerable uncertainty because of environmental issues, shifting energy consumption pattern etc. Global partnership at this stage would help RIL find new markets and preserve value which may, otherwise, erode sharply. Here is a look at the details.<\/p>\n
As per RIL\u2019s presentation, company would be separating the entire Oil & petrochemicals assets, oldest of its business, into a subsidiary called O2C (Oil-to-chemicals). This would be followed up by a possible sale of about 20% stake to Saudi Aramco for which talks began about two years ago but were on hold until recently. Saudi Aramco is a cash-rich, Saudi Arabia petrochemical giant with sales of close to $300 bn and profits of about $90 bn. In comparison, RIL\u2019s revenue is about $90 bn but profit is much lower at less than $6 bn. The value unlocking strategy is similar to what it did with its digital and retail business, where stakes were sold after hiving-off. Total funds raised from the stake sale in these subsidiaries was close to Rs 2 lakh crore which included investments from Facebook, Google etc. RIL (Standalone) would be left with assets in exploration, media and other smaller businesses.<\/p>\n
Despite accounting for the largest share of revenue and profits, O2C\u2019s share has been coming down over the years, calling for a renewed strategy for the business. As per company\u2019s presentation, O2C Business had a revenue of $62 bn (~Rs 4.5 lakh crore) in FY20, 68% of total revenue. Its EBITDA (earnings before interest, taxes and depreciation) stood at $7.4 bn, 53% of total. O2C business has been under pressure with declining crude prices over last few years. While O2C revenue has grown at 17% CAGR during FY17-20, growth for rest of the business was as much as 66%. EBITDA growth differential was even higher at 6% vs 68%. Not only the growth differential, even profitability of the businesses is significantly different with EBITDA margin of 12% for O2C vs 23% for the rest. The unlocking will address these issues, giving each business space to plan their strategy as per the dynamics of their respective sector.<\/p>\n
Any restructuring involves significant reallocation of assets and liabilities. Hiving-off here entails $42 bn of total assets being transferred from parent into the new entity including $40 bn of long-term assets. However, equity being transferred is only $12 bn with the rest being funded by loan of $25 bn from the parent. (All the borrowed funds are in the name of RIL and cannot be directly transferred to O2C without lenders\u2019 consent). The most likely reason for low equity transfer is that equity would increase significantly with the stake sale which can, then, be used to pay back the debt. Even after the hive-off, RIL standalone would have a significant balance sheet of $89 bn including $45 bn of long-term assets. This looks very high in comparison to the businesses it is left with. It is likely that assets such as mobile towers, spectrum, retail assets etc are on the books of parent company and respective subsidiaries are operating on lease model.<\/p>\n
The restructuring, expected to take another six months for completion, is another milestone in RIL’s transformation. Despite being more than three times the size of RIL, Saudi Aramco is taking an active interest because of RIL\u2019s advanced refining capacity and extensive breadth of its downstream products. It would not be surprising if Saudi Aramco creates another JV with RIL, after this deal, to build downstream facilities in Saudi Arabia. The deal may also help it find a buyer for lower grade crude oil which doesn\u2019t have a large market but RIL has the capability to process.<\/p>\n
Image Source – RIL’s Presentation<\/p>\n","protected":false},"excerpt":{"rendered":"
Reliance Industries\u2019 (RIL) announcement last week hiving-off its Oil to chemicals business into a separate subsidiary is the third and final stage of company\u2019s restructuring. The hiving-off is important not only from a re-alignment perspective but also because Oil & Petrochemicals sector is facing considerable uncertainty because of environmental issues, shifting energy consumption pattern etc. […]<\/p>\n","protected":false},"author":8,"featured_media":14359,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[856,919],"tags":[],"class_list":["post-14356","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate","category-corporate-2","membership-content","access-restricted"],"yoast_head":"\n