Why Does Reliance Opt For Demerger ? What Does It Mean For The Shareholders ?

The demerger is a very wise decision by the Reliance Group of Companies (Mukesh Ambani group). The best decision that company has made is dividing the entire group into two parts. The first part will focus on Financial services, Textile business, Upstream and Production business. The later one will focus on Oil To Chemical segments. The later one is also named as Reliance O2C on the basis of the segmentation made.

The company had issued a late night memo.  It said that the shareholders have approved the plan for the company’s demerger. The company also mentioned that this move is done to focus specifically on both these huge sectors and keep in mind the future opportunities that the company is going to get. Also the company is looking forward to its mega deal with the Oil giant Saudi Aramco which has been kept on hold for a long time. The company expects that the investment pans of the Saudi company will come into force soon.

By the end of the demerger procedure the O2C business will become a wholly owned subsidiary. The company is also aiming to get a net zero carbon footprint by the end of 2035. The major reason for the demerger was to make the O2C company a wholly owned armed Reliance group and to exercise the opportunities thriving forward.

The major accelerating factor about this demerger is the company’s indication of ongoing talks with Armaco. The shareholders and the news flash have captured these signs of major investments coming forth and this is one of the reasons why shareholders have agreed to this move.

Reliance Valuations

The valuations of the entire conglomerate would not differ in major proportion individually. The only difference that is gonna be made is by the investments that would flow into the company’s pockets. With the difference that is happening right now, the company would be able to increase the passive sources of income. Also right now the company and the entire Indian market is facing FII outflows because the dollar value is rising. The FII would soon return their investments once any catalyst comes in the way or the dollar prices fall.

The valuations would take a major upside if the Armco deal comes through and the company will receive the help from the largest oil company in the world. The company previously also received major upside in the valuation when the largest deal till date for an Indian company was qualified (Reliance – Aramco deal).

Hence if the deal comes forward and the company is successful in its carbon footprint commitment it will be an excellent move on part of the company, also the company is planning to establish Green energy plants and modify its reach in the field of telecommunication.

Management Team

The company said that the current management will continue to overlook the working of the new O2C company. Also the current working team of O2C company will move away for expansion of other businesses. This will also cause for smooth running of the other companies. The good news for the company is that the major business that the company has is in oil and petrochemical business. Also the company is expanding in this segment significantly.

With this move the oil business will come under O2C. The O2C will become a wholly owned subsidiary of RIL and hence the company is going to get benefited from this decision. The reason is there would not be any intervention form outside and the company can work at its own discretion. The cash cow of the company will however get diversified which could affect the other group’s valuation and the share prices can take hi if the plan doesn’t work out as per the strategies of the company.

Shareholders and Stakeholders Intake

The shareholders and stakeholders will get benefited with the company’s expanding reach. The spin off will cause transfer of the employees. So the stakeholders won’t suffer due to the company’s demerger plan. It is also said by the company that no employee would lose his or her job while going through this phase of transition. The shareholders have to wait and watch for the future prospects and company’s growth plans coming into effect.

The shareholders have a bit to worry about as the company’s O2C would become wholly owned by the RIL group and the shareholders part will stay in the other part of the company.

The major concern is due to the pending decision from the supreme court regarding the Future- Reliance deal. Amazon has been continuously going against the deal due to its fear of increased competition and loss of business. The company is also focussed on not letting this deal go through. However the domestic authorities are giving their nods for this deal but the supreme court decision is yet to me forth. If the deal goes through then the Reliance share price would move up. This will cause a great green rally in the entire market as the share holds a major stake in the Nifty 50 index. Also if the deal goes through the retail arm of the company would become very strong and the business would grow along with significant growth in revenues.

Reliance’s View On the Deal

Reliance Industries is looking for the bigger part of the future, by this diversification the company wants to focus on each and every segment specifically and increase the revenue from them. By this division the first part of the company would get significant performance pressure given the history of earnings and future scope. The oil business has always been the profit business for reliance since ages. This move has divided the entire group into 2 parts.

The company is also going to receive an Aramco deal which would change the entire structure of the O2C business. The other group however hinges on the company’s success with the newly launched JIOMart project and Whatsapp selling of groceries along with the Future deal. Hence the company is taking a huge bet based on its resources. However it is said that if you cut off the money arm the other part has to catch the heat and perform well to sustain. Hence this may be a strategic move by the RIL group to increase the profitability of all the segments. However with the upcoming Green project plans and possible takeover of Reliance Power the company aims to expand itself and diversify the passive sources of income.

Should You Invest In The Company ?

Well if you look into the Indian Stock Market Reliance is the elephant driving the entire index in one direction. With this move the company is taking great risk. Also one should be patient and hold his money until one of the deals comes through. Either it could be the Future-Reliance deal or it could be the Armaco- Reliance deal. The company has also been suffering in getting a value increase since the Amazon obstruction. The bull rally also cannot help the company’s share value to grow rather it stayed into one zone only.

The share is suffering from high pressure due to performance. Also if the deal comes through the company would register a robust increase. The increase may come on the market exchanges on one single day or two consecutive sessions for sure.