Mukesh Ambani Led RIL Forays into Green Energy Business

KNown for breaking through in several industry segments by investing and expanding, Mukesh Ambani led RIL has made plans to enter into the Green Energy business. Standalone RIL's plan to foray into green energy will be also be liked by investors, brokerage Nomura said in a note.

It said Reliance has indicated that it plans to build an optimal mix of reliable, lean and affordable energy using solar, wind and batteries.

The new energy business of RIL will work closely with subsidiary O2C. O2C will invest in carbon capture (to convert CO2 into useful products and chemicals) and hydrogen production to meet H2 demand as the Indian economy moves from carbon-based fuels to a hydrogen economy.

RIL standalone entity apart from holding controlling and majority stake in O2C (100 per cent post de-merger), Reliance Retail (85.1 per cent) and Jio Platforms (67.3 per cent), will now foray into new businesses based on clean and green development.

RIL plans to have a mix of renewable energy using a mix of solar, wind and batteries to transition acceleration into a hydrogen economy. This new business will work closely with O2C and target to achieve net carbon zero by 2035.

According to RIL management, a loan to O2C would make it more efficient to upstream cash from any potential stake sale in O2C.

"We note that in the past, Reliance has considered a potential 20 per cent stake sale in O2C to Saudi Aramco at a valuation of $75 billion. This transaction would have resulted in potential receipt of $15 billion. A higher loan of $25 billion indicates that Reliance could consider even more than 20 per cent stake sale to strategic investors and dedicated PE investors. In our view, any stake sales to raise cash would be taken positively by investors, similar to the large cash raise in 2020 when it sold stakes in Jio and Retail," Nomura said.

Morgan Stanley said in a research that RIL's de-merger plan for Oil to Chemicals (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, Morgan Stanley said.

CLSA said this O2C subsidiary will hold debt in the form of a $25 billion loan from the parent priced at a floating interest rate linked to one-year SBI MCLR and another $5 billion of non-current liabilities.

"We believe this demerger should pave the way for a stake sale in O2C to strategic (talks with Aramco continue) and financial investors," it said.

"Using the $75 billion EV announced for the non-binding 20 per cent stake sale to Aramco in August 2019), will translate into an equity value of $45 billion after knocking off the $30 billion liabilities at the subsidiary level. So a 20 per cent stake sale at $75 billion EV, may bring in $9 billion cash into Reliance," CLSA said.