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RIL oil-to-chemicals spin-off: Morgan Stanley overweight on the stock –

Reliance Industries (RIL) today announced that it has initiated the process of carving out its Oil-to-Chemicals (O2C) business into an independent subsidiary. The company said it will retain 100 percent management control of the subsidiary.

According to global brokerage firm Morgan Stanley, this reorganisation will lead to RIL carving out the O2C business as a separate subsidiary and support strategic partnerships and new investors in the business.

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, the global brokerage firm said in its report.

Morgan Stanley has kept overweight rating on the stock with a price target of Rs 2,252 per share.

Broking house does not see the re organization impacting consolidated financials. RIL had $5 billion of net debt and $11 billion in non-current liabilities, including spectrum, creditors amongst others as of January 2021.

RIL’s net debt in the next investment cycle will be a lot more measured as it takes the partnership/JV route, and how RIL allocates the ~ $125 billion growth capital it generates this coming decade will be key for investors looking beyond the near term, Morgan Stanley said.

If a third of the investment comes via partnerships, RIL would be FCF-positive despite the capital outlay, it added.

In a notification to exchanges, RIL said that its existing O2C operating team will move to the newly-created subsidiary with the transfer of business, but there will be no dilution of earnings or any restriction on the cash flows.

Also Read – What the RIL oil-to-chemicals spinoff means for company, investors

Execution on Jiomart, rising market share and reduced competitive intensity in Indian telecom industry and improvement in core energy margins are the risks to the upside, the report said.

However, risks to the downside include potential ban on single-use plastic that could hurt margins in the medium term, lower utilization of recently started downstream energy projects and delay in monetization of its energy and telecom asset, it added.

At 13:19 hrs Reliance Industries was quoting at Rs 2,032.70, up Rs 24.60, or 1.23 percent on the BSE.

Also read – Reliance Industries: On a four-lane superhighway 

The share touched its 52-week high Rs 2,368.80 and 52-week low Rs 867.45 on 16 September, 2020 and 23 March, 2020, respectively.

Currently, it is trading 14.18 percent below its 52-week high and 134.36 percent above its 52-week low.

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