Cover Story

Published: Dec 29, 2021
Updated: Dec 29, 2021

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What the visionary father started and nurtured, the ultra-ambitious son has taken to even greater heights. RIL's unprecedented growth in the last decade has been driven by the significant contribution of the O2C business and the rapid scale-up of new consumer segments like digital and retail.

Now, taking his growth and diversification mantra a notch higher, Mukesh Ambani has decided to carve out the O2C business into an independent subsidiary.

The parent company has kickstarted the approval process with filings with the regulatory authorities and is confident that the green signal will come by Q2FY22.

Clearly, the late Dhirubhai's elder son -- and true inheritor of his father's business acumen -- is supremely confident that the move to let the O2C business grow on its own steam will be a win-win situation for all stakeholders of the company

Starting with trading in yarns, the far-sighted and highly ambitious Dhirubhai Ambani graduated to textiles, which was a natural progression for a trader in yarns. Remarkable success in textiles followed, with the ‘Vimal’ brand becoming a household name. His lifelong mantra, which permeated through the Reliance group, was ‘Growth’. By way of backward integration, he entered the field of petrochemicals, setting up a modern plant to manufacture PTA, a raw material for manufacturing yarns. Thereafter, there was no stopping him, and in a single lifetime he did what other industrial houses manage to achieve over two to three generations – Reliance entered, and made a big name for itself, in the fields of electricity distribution, infrastructure development, telecom, financial services and even oil refining. Thus, an ordinary yarn trader who had come from nowhere became the numero uno industrialist of the country during his own lifetime.

After his untimely death, the Reliance empire was divided among elder son Mukesh and younger son Anil. Reliance Industries went to Mukesh, while other businesses, including infrastructure, electricity distribution, telecom and financial services, were handed over to Anil. Though Anil ultimately failed to stay in control of his businesses and almost half of Dhirubhai’s erstwhile business empire was lost by the Ambani family, Mukesh, on the other hand, not only stewarded his portion of the business empire well but took it to dizzy new heights.

Thanks to his vision, deep business knowledge, innovative approach and manmanagement capabilities, Reliance Industries has scaled new highs in the business world, not only in India but worldwide.

MEGA INVESTORS

Taking strongly after his late father’s ‘growth’ mantra, Mukesh not only expanded his business of oil and petrochemicals but also entered the fields of telecom, retail and ecommerce, making the RIL business empire the number one corporate entity in the country. He went a step further, attracting mega investors to Reliance. While Dhirubhai made Indian investors queue up to subscribe to Reliance equity issues, Mukesh has even made global giants, including Facebook, Google and Amazon, stand in line to invest in RIL’s various platforms. Thus, even if one does not take Anil’s businesses into account, Mukesh has taken the Reliance empire to a much higher level than that achieved by Dhirubhai.

With changing times and the emergence of new technologies, Mukesh has reorganized his vast business empire via verticals like telecom, retail and e-commerce. In his latest foray, he has decided to hive off the hugely profitable oils-to-chemicals vertical as a separate subsidiary.

HUGE POTENTIAL

Needless to say, his latest foray is driven by his late father's, and his, 'growth' mantra. As a result, RIL, India's largest company by revenue, will soon reorganize its O2C (oil to chemicals) subsidiary - which as it exists today contributes the lion's share to RIL's consolidated revenues ($ 90.4 bn in FY 20) -- so as to capture new growth opportunities in a business segment with huge domestic and global potential.

According to Mukesh's plan presented to the BSE and NSE on the proposed reorganisation of its O2C business, the company's three mega growth engines comprise O2C, Jio and Retail.

The company has broken down its O2C proposal into 5 key sections:

1. 1) Unique fully-integrated platform: O2C's world-class assets include a 1.4 million barrels per day (mbpd) of crude refining capacity and 38.4 million tonnes of petrochem production, while it is a leading global producer of PTA and PX, with 9 manufacturing facilities in India and 3 in Malaysia. According to RIL, the Jamnagar site is the world's largest and most integrated O2C complex, while the petrochem sites at Hazira, Dahej, Nagothane and Vadodara are strategically located for logistical cost advantage. The O2C portfolio covers a wide spectrum of fuels, polymers, elastomers, aromatics & fibre intermediates, and polyesters, and caters to clients from construction, auto fuels, automobiles and consumer goods to textiles and beverages. In fact, the existing O2C business has 1,400 fuel retail outlets and has targeted 5,500 fuel retail outlets over the next five years. Future plans include EV charging and lowcarbon solutions. To this end, RIL and British Petroleum have formed a 51:49 JV.
2. 2) Reorganisation of O2C: The existing shareholding pattern will remain the same, with the promoters holding 49.14% shares and the remainder with DIIs, FIIs and retail investors. The only change will be that 100% of the shares will vest in the wholly owned Reliance O2C subsidiary. After restructuring, the new subsidiary will wholly own Reliance Global Energy Services Singapore, Reliance Global Energy Services UK and Reliance Ethane Pipeline Ltd. It will also have a 51% stake in Reliance BP Mobility Ltd and a 74.9% stake in Reliance Sibur Elastomers Pvt Ltd. The current refining and petrochem assets of RIL at Hoshiarpur, Barabanki, Jamnagagar, Vadodara, Dahej, Hazira, Silvassa, Patalganga and Nagothane will be transferred to the new subsidiary. So also will other assets like storage tanks, real estate, intellectual property, employees and other subsidiaries in India and overseas be transferred to the new subsidiary. According to RIL, the approval process involving the regulatory authorities has commenced and is expected to be completed by Q2FY22.
3. 3) Financial performance of O2C in context of RIL: For the fiscal years FY17 to FY20, the O2C business has had the lion's share of all RIL revenues -- from $ 38.9 bn (of a total of $45.2 bn) in FY 17 to $ 61.8 bn (of $90.4 bn) in FY20. During this period, the CAGR has been 26%. In terms of EBIDTA for the same period, the figures have been $ 6.2 (of a total of $ 7.6) in FY17 and $7.4 (of $14) for a CAGR of 23%. On a stand-alone basis, the O2C balance sheet as of January 1, 2021 shows long-term assets of $ 40 bn and net working capital of $ 2 bn, while liabilities are $ 12 bn in equity, $ 25 bn is a loan from RIL, and non-current liabilities are $ 5 bn. In other words, the proposed subsidiary has a well-capitalised balance sheet supported by high-quality assets. Among the financial benefits of the reorganisation are: O2C will pay a floating rate interest to RIL linked to the 1-year SBI MCLR rate; there is flexibility to structure repayments of the long-term loan, and the cash flows will selffund growth projects. Besides, the reorganisation will have no impact on RIL's consolidated financial position.
4. 4) RIL and O2C post reorganisation: Apart from RIL's existing businesses, including upstream oil and gas, retail, digital services and financial services, new businesses will be new energy & new materials, and digital and incubation platforms. The new energy & new materials segment in particular will highlight RIL's vision of clean and green development with an optimal mix of solar, wind and battery power, with the aim of making the company net carbon zero by 2035. As for O2C, it will focus on recycling, reducing its carbon footprint, conversion of crude and feedstock to monomers and derivatives, and technology to capture and convert carbon dioxide into useful products and chemicals. It will also accelerate the transition from traditional carbon-based fuels to a hydrogen economy .
5. 5) Key considerations for stakeholders: O2C will be one of 4 high-growth engines driving value creation, the others being digital, retail, and new materials & new energy.

WIN-WIN FOR ALL

In conclusion, Reliance Industries Ltd's grand plan to make O2C an independent entity will be beneficial to all stake holders. This will lead to creation of a new global growth engine for RIL with the potential for strong cash flows, there will be no impact on RIL's financials and credit ratings, there will be greater participation by strategic and financial investors in O2C, and the new energy & new materials business of RIL will accelerate. Not least, the reorganization will pave the way for more attractive re-rating and sustainable value creation.

One can say, without fear of contradiction, that the late Dhirubhai Ambani would have been immensely proud of his son Mukesh's vision and execution ability to take the Reliance empire to even higher levels. In fact, there has been no parallel on the global business scene to the huge achievements of the father-son duo of Dhirubhai and Mukesh Ambani. What is more, the Reliance business juggernaut is certain to keep on rolling and overshadowing other corporate empires for years to come.