Reliance Inds gains 6% in 2 days, hits 4-month high on O2C biz spin off

Shares of Reliance Industries Ltd (RIL) were up 4 per cent at Rs 2,150 on the BSE in intra-day trade on Thursday, having gained 6 per cent in the past two trading days after the company announced the proposal to hive off its oil-to-chemical (O2C) business into an independent unit. The stock was trading at its highest level since October 21, 2020. It had hit a record high of Rs 2,369 in September last year.

RIL in a presentation on Tuesday, February 23, announced the initiation of the formal process of carving out the O2C business into a wholly-owned independent subsidiary. The management reorganised the refining and petrochemical businesses into O2C to facilitate holistic and agile decision making, pursue attractive opportunities for growth with strategic partnerships, and drive its downstream business.

The company had already received approval from the Securities and Exchange Board of India (Sebi) and stock exchanges to create this subsidiary. It now requires the approval of equity shareholders and creditors, regulatory authorities, and the income-tax authority, besides the National Company Law Tribunals (NCLTs) in Mumbai and Ahmedabad. RIL said the approval process had commenced and is expected to be completed by the second quarter of the 2021-22 financial year.

Analysts believe the recent move of creating an O2C segment will open various new avenues for RIL in terms of both opportunities and upside.

“The company has clearly become a case study at many ivy leagues after raising Rs 2,202 billion during the Covid-19 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),” Motilal Oswal Securities said in a report.

After the reorganisation of the refining and petchem business in the December quarter (Q3FY21), the management no longer provides key operational parameters such as refining and petchem margins. We reiterate our stance that higher integration would result in better margin, the brokerage firm said.

Analysts at IDBI Capital expect this move by RIL to further smoothen the way for its stake sale of O2C to Aramco or any other strategic partners as well. The company’s focus on new materials, hydrogen-based economy and the huge benefit of economies of scale would benefit the company in the long-run despite the current lower GRM.

“RIL's de-merger plan for O2C business is a step towards monetisation and acceleration of its new energy and material plans into batteries, hydrogen, renewables and carbon capture - all of which point to the next leg of multiple expansion and clarity on the next investment cycle. With this reorganisation, 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,” analysts at Morgan Stanley said in a note.