RIL may recover on demerger and Jio tariffs hikes after sliding on cancellation of Saudi Aramco (SE:2222) stake sale deal
Reliance Industries (NS:RELI) (RIL/RELI) stumbled after Q2FY22 Report Card on Negative FCF (Free Cash Flow), muted ROE (Return on Equity), and Jio’s subscriber loss Concern. Further, RIL slips from 2600 levels to 2309 after RIL called off a potential 20% stake sale (deleveraging) with Saudi Aramco for its O2C (oil to chemical) business for $15B. RIL was also under stress on the continuous exit of Jio subscribers.
But RIL soared over +6% Thursday on demerger move after the company announced to implement a Scheme of Arrangement (Scheme) to transfer Gasification Undertaking into a Wholly-Owned Subsidiary (WOS). RIL was also upbeat amid a report that DreamWorks& E! Entertainment is coming to India with Jio for a possible JV.
On 19th November (Friday), the Indian stock market was closed for a holiday and RIL released an official media statement in the night on Saudi Aramco deal revaluation. Insiders may have already access to the information and the scrip was already down almost -5% in the last few days before the official statement and on Monday (22nd November), RIL corrected another -4.43%.
RIL said in its media release on 19th November:
Reliance Industries Limited and Saudi Aramco signed a non-binding Letter of Intent inAugust 2019 for a potential 20% stake acquisition by Saudi Aramco in the O2C Business of Reliance. Over the past two years, both the teams made significant efforts in the process of due diligence, despite Covid restrictions. This has been possible due to the mutual respect and long-standing relationship between the two organizations.
Reliance recently unveiled its plans for the New Energy & Materials businesses by announcing the development of the Dhirubhai Ambani Green Energy Giga Complex at Jamnagar. It will be amongst the largest integrated renewable energy manufacturing facilities in the world.
The Four Giga Factories which will be part of the complex will include:
1. An integrated solar photovoltaic module factory for the production of solar energy
2. An advanced energy storage battery factory for storage of intermittent energy
3. An Electrolyser factory for the production of green hydrogen and
4. A fuel cell factory for converting hydrogen into motive & stationary power
Jamnagar, which accounts for a major part of the O2C assets, is envisaged to be the centre for Reliance’s new businesses of Renewable Energy & New Materials, supporting the NetZero commitment.
Due to evolving nature of Reliance’s business portfolio, Reliance and Saudi Aramco have mutually determined that it would be beneficial for both parties to re-evaluate the proposed investment in O2C business in light of the changed context. Consequently, the current application with NCLT for segregating the O2C business from RIL is being withdrawn.
The deep engagement over the last two years has given both Reliance and Saudi Aramco a greater understanding of each other, providing a platform for broader areas of cooperation. Saudi Aramco and Reliance are deeply committed to creating a win-win partnership and will make future disclosures as appropriate.
RIL shall continue to be Saudi Aramco’s preferred partner for investments in the private sector in India and will collaborate with Saudi Aramco & SABIC for investments in Saudi Arabia.
Saudi Aramco and RIL have a very deep, strong, and mutually beneficial relationship, that has been developed and nurtured by both companies over the last 25 years. Both companies are committed to collaborating and working towards strengthening the relationship further in the years ahead.
Further on 24th November night, RIL released another media statement (exchange disclosure):
Reliance to Restructure and Repurpose Gasification Assets
The Board ("the Board") of Reliance Industries Limited (“the Company” or “RIL”) has today decided to implement a Scheme of Arrangement (Scheme)to transfer Gasification Undertaking into a Wholly-Owned Subsidiary (WOS).
The Gasification project at Jamnagar was set up with the objective to produce syngas to meet the energy requirements as refinery off-gases, which earlier served as fuel, were repurposed into feedstock for the Refinery Off Gas Cracker (ROGC). This enables the production of olefins at competitive capital and operating costs. Syngas as a fuel ensures the reliability of supply and helps reduce volatility in energy costs. Syngas is also used to produce Hydrogen for consumption in the Jamnagar refinery.
RIL targets to have a portfolio that is fully recyclable, sustainable and net carbon zero. This will be achieved by transitioning to high-value materials and chemicals with renewables as the source of meeting its energy requirements. As RIL progressively transitions to renewables as its primary source of energy, more syngas will become available for up-gradation to high-value chemicals including C1 chemicals and Hydrogen. Further, the carbon dioxide released during the process of producing Hydrogen is highly concentrated and easy to capture, substantially reducing the cost of carbon capture. Overall, these steps will help sharply reduce the carbon footprint of the Jamnagar complex.
India is a high-growth market and is expected to continue to see a deficit of these high-value chemicals in the foreseeable future. Repurposing the Gasification assets will help use syngas as a reliable source of feedstock to produce these chemicals and cater to growing domestic demand, resulting in an attractive business opportunity. Further, as the hydrogen economy expands, RIL will be well-positioned to be the first mover to establish a hydrogen ecosystem.
With optionality in applications for Syngas, the nature of risk and returns associated with the gasifier assets will likely be distinct from those of the other businesses of the Company. This distinct business profile also provides the opportunity to potentially attract a different pool of investors and strategic partners for the gasification assets and new materials and chemicals projects.
The Board has accordingly approved a Scheme to transfer the Gasification Undertaking as a going concern on a slump sale basis for a lump sum consideration equal to the carrying value as on the Appointed Date.
As per reports, RIL may hive off parts of its oils-to-chemicals division to make it easier to induct investors and unlock value after it scrapped a plan to sell a $15B stake in the business to Saudi Aramco. As the first step of the new strategy, RIL decided to transfer the company’s gasification assets to a wholly-owned subsidiary last week.RIL is looking at the elements of the O2C business in light of its net carbon zero goals and may also hive off more such businesses.
RIL is investing Rs.75B (around $10B) over the next three years in green energy initiatives, including the Dhirubhai Ambani Green Energy Giga Complex in Jamnagar, as the refining and petchem major shifts its focus from hydrocarbons to renewable power. RIL has set itself a target to become a net-zero carbon company by 2035.
RIL invested $4B in setting up 10 synthetic gasifiers in 2012 to convert petcoke, one of the dirtiest refinery by-products, into gas to meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 MT a year, generated from two of its cokers. The technology for petcoke gasification, RIL said in 2012 would help it produce 23 mscmd (million standard cubic meters a day) of syngas and will aid in reducing R-LNG (regasified-liquefied natural gas) intake for its refineries. The project, however, saw a three-year delay by when the LNG prices moderated.RIL said it seeks to attract strategic investors for the gasification and new materials/chemical projects.
As per Morgan Stanley (NYSE:MS):
RIL’s move to separate its petcoke gasifier assets is another step towards monetizing the potential synergies between its existing energy infrastructure and new energy plans. While investors have been sceptical about returns on the petcoke gasifier business for the past five years, the environment of high global gas prices, gasifier’s ability to produce hydrogen, which can be converted into blue hydrogen (using carbon capture), and gasifier output of syngas (valuable in producing higher value add chemicals)—all now make it a highly profitable investment after multiple years of challenges.
Looking ahead, apart from the demerger/restructuring move, RIL may also recover as Jio hiked its tariffs by 20% for most of its plans after Bharti Airtel (NS:BRTI) and Vodafone Idea (NS:VODA) did the same a few days ago. As most of Indian is now operating almost normally from COVID disruption a few months ago, RIL may be also boosted by catch-up demand from the Retail segment.
Fair Valuation of RIL:
In FY21, RIL reported core operating EPS 92.39 amid COVID disruptions. RIL’s pre-COVID core operating EPS was around 114.20. In FY22, RIL may report core operating EPS around 138.59 as per the present trend (Q1/Q2FY22). Looking ahead, as an export savvy with increasing domestically focused company, RIL may report 15% CAGR in its core operating EPS amid faster reopening of the economy in AEs as well as in India. In that scenario, assuming a decent average PE of 20 (in line with previous trends), the FY: 22-25 valuations may be around 2772-3188-3666-4215. As the market is now discounting FY23 earnings, RIL may scale 3182 levels by Mar’22 and subsequently 3666 by Mar’23 and 4216 by Mar’24. For RIL, an average core operating PE of 20 may be reasonable due to elevated CAPEX and negative/muted FCF issues.
Technically, whatever may be the narrative, RIL now has to sustain over 2515 for an immediate target 2560/2605-2675/2750; on the other side, sustaining below 2500, it may fall to 2545/2390-2365/2350-2315/2300 levels
