Reliance to Restructure and Separate Gasification Assets
In an interesting move in the stock markets, the stock of Reliance Industries was the top gainer on the Nifty on 25th November, gaining 6.4% in a single day. This bounce comes after a couple of days of weakness due to the stake sale in the O2C business to Aramco being put off.
The enthusiasm for the Reliance stock on 25th November was driven by its decision announced late on 24th November to restructure and separate its gasification assets.
In a late announcement on 24-November, Reliance Industries said that it would transfer the gasification undertaking into a 100% subsidiary, giving it a distinct legal status. First a background of this gasification project at Jamnagar in Gujarat.
The idea of the gasification project was to produce Syngas, which is supposed to be a very reliable source of gas and also less volatile in terms of energy costs. Syngas is short for synthetic gas.
Reliance sees a massive business opportunity in using the Syngas produced at its Jamnagar plant as a source of feedstock to produce chemicals and olefins. This will be used to cater to the growing domestic demand for such chemicals and olefins.
Since, Syngas is a synthetic gas, it would provide Reliance Industries with a first-mover advantage in the emerging hydrogen ecosystem. That is where most of the green investments are going currently.
More importantly, this move allows Reliance to unlock the value of syngas, which is part of the next generation of clean fuels that Reliance wants to focus on.
By separating this into an independent standalone unit, it would be possible to improve return ratios and the ROI of the syngas project by adopting an asset light approach. It also provides more focus to a dedicated gasification subsidiary, in terms of skillsets, technology and capital allocation.
This move to separate the gasification business also facilitates a subsequent sale of stake in the syngas franchise to strategic partners or PE funds. One thing that has emerged in the last few years is that alternate energy with strong green focus has a much better business base-case compared to traditional energy.
Even from a valuation standpoint, this separation of the gasification business into a separate unit makes eminent business sense.
Start Investing Now!
Open Free Demat Account in 5 mins