Why Mukesh Ambani-led Reliance's decision to drop merger plan with subsidiary RNEL is good news

Almost a year after Reliance Industries Limited (RIL) decided to merge subsidiary, Reliance New Energy Limited (RNEL), the plan has been dropped. In a communique to the exchanges late last week, RIL said, “Based on a review of the new energy/renewable energy business and investment structure, the board has decided that the business should be undertaken through RNEL and the scheme be withdrawn.”

Green energy has been a huge focus area for RIL and in mid-2021, its Chairman, Mukesh Ambani outlined an investment of Rs 75,000 crore over a three-year period. Of this, Rs 60,000 crore was to go into setting up four giga factories. To be housed in Jamnagar, they will make photovoltaic cells, green hydrogen, electrolysers, batteries and fuel cells. The other Rs 15,000 crore will be invested in developing the value chain and partnerships.

Industry trackers maintain this decision is a positive and augurs well for the energy behemoth.

“Global funds today have a huge thrust on green energy and would like the two businesses to be separate,” Deven Choksey, Promoter and MD of KRChoksey Group, a wealth management firm, told BT. RIL, with its O2C business (oil-to-chemicals) business may be viewed as a deterrent when it comes to raising funds in green energy.

“There is no doubt that crude oil will be widely used for the next 25-30 years but companies need to make the right moves on green energy. In that sense, this decision is not just smart and logical but a business imperative,” he added.

It also gives the large companies to reorient their carbon-emitting businesses and, at the same time, push hard the green energy story.

The other big reason might have been the huge potential upside on valuation.

Mahesh Singhi, Founder & MD of Singhi Advisors, an M&A advisory firm, is clear that over time the numbers will only get larger. “Those in green energy will have significant access to capital through both debt and equity. This is still a business with several moving parts and a lot of things are gaining shape,” he said. In the backdrop of ESG becoming even more significant, RIL may have seen the ability to raise large amounts of money from quality investors.

“Most large groups like Reliance will be able to raise money at the lowest possible cost of capital. There is no doubt green energy will bring in large amounts of capital,” he adds. Choksey maintains the decision also gives RNEL to go through the challenging phase and later raise capital on its own. “It will be an independent entity with a chance to create a robust business model," he noted.