RIL could spin-off assets; create independent companies

Reliance Industries (RIL), India's largest private company by revenues, is likely to go through a structural change, spinning off assets and balance sheet to form an umbrella of independent companies which can survive on respective cash flows. The move is aimed at facilitating the planned strategic investments in group businesses -Reliance Jio, Reliance Retail, refining and petrochemicals. "It will force businesses to find their own growth capital and service debt liabilities using its own cash flows," say sources in the know. These companies will have separate governance structures.

Mukesh Ambani-controlled RIL has been using cash flow from its flagship petroleum refining business to build the telecom and retail subsidiaries as well as acquiring shale gas in the US and media assets. RIL spent about Rs 3.5 lakh crore to build Reliance Jio and invested about Rs 1 lakh crore for expanding the petrochemicals business in the last five years.

"In the new structure, all companies are expected to be independent entities under a holding company. They will have separate balance sheets, earning filings and governance structures. The liability of one company will not affect the other. They cannot cross-utilize cash flows. The investor will get the freedom to choose the sector they want to be in, rather than investing in a bouquet of companies," said sources. However, it's not clear whether RIL will become a holding company like Tata Sons or not.

RIL is valued at Rs 7.75 lakh crore and unlocking assets generally fetch better valuations. Bajaj group for instance had spun off its auto finance business from Bajaj Auto in 2008/09 which resulted in multiplying the group's aggregate market valuations. Aditya Birla, JSW and Adani groups have also incubated many businesses under listed entities and later spun off to fetch greater valuation. RIL generated a profit of Rs 39,588 crore in the last financial year on revenues of Rs 622,809 crore.

In the recent annual general meeting, Ambani talked about Saudi Aramco's strategic investment plan in RIL's oil to chemicals (O2C) business-basically refining and petrochemicals. Aramco plans to pick a 20 per cent stake in RIL's refining and petrochemicals assets and 10 per cent stake in the RIL-BP Plc petroleum retail joint venture for Rs 1.1 lakh crore. Besides, Ambani expressed his interest to bring in strategic and financial investors in Jio and Reliance Retail, before its public offering of shares, which they planned to do over five years.

In 2011, the company had brought in British giant BP Plc as strategic investor in its oil and gas exploration and production (E&P) business, by selling 30 per cent stake for $7.2 billion. Before that, American oil giant Chevron came in as strategic investor in Reliance Petroleum in 2008/09, but exited soon after.

After BP was roped in a strategic partner, the E&P subsidiaries of RIL haven't seen much investment and it posted back-to-back losses in the last three years. RIL developed the E&P assets in the last decade using the cash flow from its mainstay businesses and borrowings. The investment from BP has been used to repay debts it took to develop the Krishna-Godavari (KG) basin, said sources. After a long time, RIL and BP are now planning to pool in Rs 35,000 crore for developing three sets of natural gas fields in the KG basin.

After the latest round of investments, the petrochemicals vertical of RIL has emerged as the largest earnings before interest and tax (EBIT) generating vertical for the first time in the last financial year, overtaking refining business. If the Aramco deal materializes, the proceeds may be used to clear the debt of the oil and chemicals verticals and it can become an independent company from then.

Similarly, the debt clear off plan for Reliance Jio is also underway by bringing in a strategic investor. RIL has formed two investment infrastructure trusts (InvITs) and transferred some of the assets and liabilities into it and brought in an affiliate of Brookfield Asset Management as investor. The Brookfield firm had agreed to subscribe Rs 25,215 crore worth units in the Tower Infrastructure Trust. The move is perceived as the first step to make Jio independent. Jio's EBITDA stood at Rs 15,102 crore in FY19, compared to Rs 6,734 crore in FY18. It is a sharp rise but the size of the EBITDA is not enough to recover investments of Rs 3.5 lakh crore in the next 10 years, say analysts.

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