S&P upgrades RIL on strategic clarity, strong competitive position

S&P upgraded RIL to BBB+ from BBB but maintained a negative outlook, saying it seflects the soverign credit rating on India

Standard & Poor's Ratings Services today upgraded Reliance Industries (RIL) to 'BBB+' from 'BBB'. The rating agency, however, maintained a negative outlook.

In a press statement, S&P said that the negative outlook on Reliance reflects the outlook on the sovereign credit rating on India.

"We have upgraded Reliance because we believe the company's strategy to grow organically will strengthen its competitive position and support its profitability," said Standard & Poor's credit analyst Andrew Wong. "Reliance's articulation of its growth strategy removes the uncertainty regarding the company's use of its high cash balance."

"We now understand the company's strategy to invest in its core businesses which are primarily Refining, petchem and exploration and production business. And that we believe would amount to more than $30 billion over the next three-four years. And this investment will help improve the company's competitive position further from the current level," said Mehul Sukkawala, credit analyst, on a conference call with the media.

 
"Investment in petcoke gasification plant will help RIL's refining margins going forward. The capacity that they are investing in petchem business will help in value addition and further integrate their refining business with petchem business, inturn improving their petchem margins," Sukkawala added.

S&P expects RIL's capital spending in exploration and production to enable it grow its shale gas business and reverse the fall in production in KG D6 gas field.

S&P added that it expects the very high capital spending to weaken RIL's financial metrics, which are currently very strong. Nevertheless, it anticipates that financial metrics will remain commensurate with the indicative ratios for the rating.

S&P said the company's ratio of debt to ebitda was 1.1 times for the fiscal year ended March 31, 2013. "We adjust debt for cash of Indian rupee Rs 800 billion after deducting Rs 75 billion, which we believe is a sufficient minimum cash reserve for the company's operations," it said.

"We expect the debt-to-ebitda ratio to weaken to 2 times to 2.5 times in fiscal 2015, before gradually recovering to less than 2 times in fiscal 2017. The improvement in Reliance's operating performance and the company's good track record in project execution should help cushion the effects of high capital expenditure. We anticipate that net sources of liquidity will remain positive even if ebitda declines by 30%," S&P said.

"We could lower the rating on Reliance if we lower our transfer and convertibility assessment on India, which could happen if we downgrade the sovereign. We could also lower the rating if we expect the company's debt-to-ebitda ratio to remain above 2.5x on a sustained basis. This could happen if: (1) Reliance's capital expenditure is higher than expected; (2) significant delays or challenges in project commissioning adversely affect our projections of an increase in the company's cash flows; or (3) a significant weakening of the industry undermines Reliance's operating performance," the rating agency said.