Analyst Corner: ‘Buy’ on RIL; investment may come in O2C business as well

Reliance O2C (RIL O2C) will be a wholly owned subsidiary of RIL.

RIL in a recent presentation announced initiation of the formal process of carving out the O2C business into a wholly owned subsidiary. The company has clearly become a case study at many ivy leagues after raising Rs 2,202 billion during the pandemic.

After selling stakes in both RJio and Retail, it now used a leaf from its own book. The move to merge the refining and petchem businesses, coupled with its net cash status, may attract investments in the O2C business as well (a perfect replica of RJio deals).

In our report, Oil-to-chemicals – Gearing up for next orbital change? we highlighted potential upside for the company with the integration of its oil-to-chemicals business. In FY20, RIL’s EBITDA from refining stood at $6.6/bbl v/s $15.6/bbl in petrochemical.

As per our assumptions, a 10% rise in O2C conversion from ~24% at present, would result in EBITDA improvement of ~$476m, or 6.8% of standalone FY23E EBITDA. We remain optimistic on the prospects of huge value unlocking in the O2C segment as well and reiterate ‘buy’.

The management reorganised the refining and petrochemical businesses into oil-to-chemicals (O2C) to facilitate holistic and agile decision making, pursue attractive opportunities for growth with strategic partnerships, and drive its downstream business. Reliance O2C (RIL O2C) will be a wholly owned subsidiary of RIL. All the refining, marketing, and petchem assets will be moved to this subsidiary (along with other trading and manufacturing subsidiaries held aboard).

The O2C transfer came into effect from January 1, 2021, and approvals from SEBI and stock exchanges are in place. The management expects the consent process (from shareholders and creditors) to be completed by 1QFY22, with NCLT approval (from Mumbai and Ahmedabad) expected in 2QFY22.

RIL will fund the O2C assets of $42 billion ($40 b in long-term assets and $2 b in net working capital) via an interest bearing loan of $25 billion. RIL O2C will pay off this loan at a floating rate interest linked to the one-year SBI MCLR rate. Rest will be balanced in equity ($12b) and non-current liabilities ($5b). There will be no impact on RIL’s consolidated financials and the transfer of assets to the O2C business will be tax neutral.

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