The wholly owned unit’s assets will be funded by the interest-bearing loan

An employee aligns a retractable belt with the Reliance logo at a Reliance Digital store in Mumbai on April 21, 2017. (INDRANIL MUKHERJEE / AFP)

Reliance Industries Ltd has started carving out its new oil-to-chemicals operation into an independent unit with a US$25 billion loan from the parent, as billionaire Mukesh Ambani steps up efforts to unlock the value of his businesses.

The wholly owned unit’s assets will be funded by the interest-bearing loan, which will be an “efficient mechanism to ZIGBEE Module upstream cash, including any potential capital receipts,” in the unit, according to a company presentation filed with the stock exchanges.

With this reorganization,Reliance Industries Ltd 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 or technology.

Mayank Maheshwari, Morgan Stanley analyst

Oil-to-chemicals contributed more than 60 percent in the last financial year to the group’s revenue that’s been lately pivoting toward consumer businesses such as technology and retail. Splitting the business will make it easier for Ambani to bring in investors and help expedite a proposed stake sale to Saudi Arabian Oil Co.

“With this reorganization, RIL will have four growth engines- digital, retail, new materials and new energy,” Morgan Stanley analyst Mayank Maheshwari wrote in a Feb 23 note. “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.”

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Shares of Reliance had advanced 1.6percent to 2,040 rupees (US$28.2) per share as of 11:33 am in Mumbai, outstripping the rise in the benchmark S&P BSE Sensex.

Potential Stake Sale

Creating the unit “facilitates participation by strategic and financial investors for value discovery and unlocking,” Reliance Industries said in the presentation. It expects the separation to be completed by September. Approvals have been received from the markets regulator and stock exchanges, and the company will seek a nod from shareholders and creditors in the first quarter of the year starting April, it said.

Reliance’s “separation of its O2C business to a subsidiary will facilitate a potential stake sale to Aramco, possibly enabling a further reduction” in its net debt, Sweta Patodia, an analyst at Moody’s Investors Service said in an email.

Ambani amassed more than US$27 billion last year from global investors including Facebook Inc and Google through stake sales in his retail and digital ventures, turning Reliance net-debt-free. Ambani has promised to offer 5G services on his wireless network as early as this year and expand into cleaner fuels to ride the global energy transition.

The spinoff won’t dilute earnings or restrict cash flows for Reliance and it expects to retain its investment grade international and domestic credit ratings, according to the presentation. 4G Module Reliance said it plans to accelerate hydrogen production and invest in carbon capture and storage technologies to convert carbon dioxide into useful products and chemicals.

Reliance has floated separate units twice earlier for funding two refineries on India’s west coast. The entities were merged with the parent on the completion of the plants, which can together now process 1.4 million barrels of crude daily, making it the world’s biggest oil refining complex.