RIL O2C Business Restructuring - Chances of M Cap destruction of RIL

By Research Desk
about 2 months ago

Reliance industries (RIL) is hiving off its O2C business, broadly being Refinery and Petrochem verticals, into a wholly owned subsidiary (WoS).  Ultimate aim of RIL is to part monetize O2C stake in its WoS.  

Assuming 20% stake monetization of O2C subsiduiary, RIL will be holding 80% stake in O2C Subsiadiary, 85.1% in Retail Subsidiary, and 66.3% in Jio Subsidiary. Other independent or standalone business of RIL are nothing significant to talk about, like Media, and Financial Services. This will make RIL a pure holding company, while market has never been kind in giving proportionate valuations, as arrived at of Subsidiaries, to the Holding company.

Few listed Holding Subsidiary companies and their valuations are given below-
1)    Grasim Indutries is holding 57.5% stake of Ultratech Cement. Ultratech M cap is at Rs. 1.88 lakh crore. So, Grasim stake of Ultratech is at Rs. 1.08 lakh cr. Grasim M cap is at Rs. 87k cr, with its own Chlor Alkali and VSF business, with debt free status.Holding company discount is at over 60% in Grasim.
2)    Vedanta is holding 64.92% stake of Hinduastan Zinc (HZL). M cap of HZL  is at Rs. 1.35 lakh crore. So, Vedanta stake of HZL is at Rs.87k cr. Vedanta M cap is at Rs. 81k cr, with its own Oil, Aluminium, Iron Ore, Power, Copper business, with stanalone debt of Vedanta at Rs. 20k cr. only..Holding company discount is at over 55% in Vedanta.
3)    Sundaram Clayton is holding 57.40% stake of TVS Motor (TVS). M cap of TVS  is at Rs. 30k crore. So, Sundaram stake of TVS is at Rs.17k cr. Sundaram M cap is at Rs. 7k cr, with its own Auto Ancillary business, with debt free status..Holding company discount is at over 65% in Sundaram.
4)    EID Parry is holding 56.42% stake of Coromandal International(CIL). M cap of CIL  is at Rs. 23k crore. So, EID stake of CIL is at Rs.13k cr. EID M cap is at Rs. 6k cr, with its own Sugar business, with stanalone debt of EID at Rs. 200 cr only..Holding company discount is at over 60% in EID.

Even now, subsidiaries of Jio and Retail are seen ruling at rich valuations, as seen in SOTP Valuations. This iwill be seen realised by FIIs as well, as stock is also seen in a distribution phase. Rise of RIL yesterday in last 1 hour was irrational and unwarranted. So it is most likley that RIL will be facing a sharp fall in its M cap, maybe by end of Q2FY22, when O2C business is likely to get fructify into a WoS.

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