The conglomerate on Monday announced the contours of its demerger of its O2C (oil-to-chemicals) business into a wholly-owned subsidiary, in order to attract global investors like Saudi Aramco and sought shareholder and creditor approval.
“RIL’s demerger 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,” said Mayank Maheshwari, Equity Analyst at Morgan Stanley.
He has set a target price of Rs 2,252 on the stock, a potential upside of 12 per cent from the last close. Following the demerger announcement, the stock advanced nearly 2 per cent to Rs 2,053 on Tuesday.
With this reorganization, RIL will have four growth engines–digital, retail, new materials and new energy, Maheshwari highlighted, adding he sees significant upside risk to earnings and multiples for O2C as RIL invests in new energy/technology.
RIL management sees the exercise as a rewarding one for shareholders as O2C reorganization will create an independent and global scale growth engine for RIL with strong cash flow generation potential. It also presents a potential for re-rating and sustainable value creation.
How RIL’s corporate structure will look like after the O2C reorganization.
Morgan Stanley said RIL is embarking on its journey to address the $800 billion total addressable market in organised retail and e-commerce, $300 billion in chemicals, and $50billion in renewables as demand shifts from oil to alternative fuels.
The broker also believes the company’s debt load will also not be as much as it has happened in the past. In the last round of expansion, debt surged to record levels but the asset base also doubled in just seven years.
“RIL’s net debt in the next investment cycle will be a lot more measured as it takes the partnership/JV route. How RIL allocates $125 billion growth capital it generates this coming decade will be key for investors looking beyond the near term, in our view. If a third of the investment comes via partnerships, RIL would be FCF-positive despite the capital outlay,” the broker said.