Fitch revises RIL's rating upward to 'stable'

Fitch Ratings on Monday revised upwards its outlook on Reliance Industries' (RIL) long-term local currency rating at 'BBB stable' from 'positive', citing a better than expected show by its US shale gas business, which offset the dip in the domestic exploration business. The agency said the rating revision reflects continuing strong financial and operating performance. The report noted RIL continues to consistently out-perform the regional refining margin benchmarks. Fitch expects its profitability from refining and mid-stream operations to improve further, once the on-going investments for capacity addition and to improve efficiencies are completed over the next two to three years. "The change of outlook on the local currency issuer default ratings, which is not constrained by the BBB-sovereign- to stable reflects our revised expectations on RIL's medium-term credit metrics and the revenue contribution of the upstream oil and gas business," it added.

"We now believe RIL is not likely to meet the levels articulated in our earlier research in the next two-three years, at which we would take positive rating action," Fitch said in a note.

On its performance, the report noted that RIL continues to consistently out-perform the regional refining margin benchmarks. Fitch expects its profitability from refining and mid-stream operations to improve further once the on-going investments for capacity addition and to improve efficiencies are completed over the next two to three years.

However, it noted that the company faces challenges on domestic E&P business in the form of geological risks, with gas production from the KG D6 basin falling to 12.8 mmscmd in the first half from 13.8 mmscmd in FY14 and 26 mmscmd in FY13.

But it noted that this fall is "counterbalanced" by a 38 percent volume growth in the US shale gas business. US shale gas's contribution to the earnings of the exploration and production (E&P) business has risen to INR 1,050 crore, out of the segmental earnings of Rs 1,860 crore in first half of fiscal.

Another key problem area is gas pricing uncertainty even after the government revised gas price from the last month to USD5.6/mmbtu from USD4.2, as the company is not allowed to charge the new price till the arbitration case is not over.

Fitch expects that RIL will continue to generate strong operating cash flows of USD 6-8 billion a year.

However, the high capex needs (USD11 billion planned for telecom till next fiscal) will lead to negative free cash flows for the next two years and is likely to lead to an increase in the net leverage, from 2 times in FY14. But the net leverage, though, is likely to remain well under 3 times, which is comfortable for the company's ratings.

Reliance has a cash balance or cash equivalent of Rs 77,700 crore as of Q2, while its debt stood at over Rs 84,000 crore.