S&P upgrades RIL rating on clarity in expansion strategy

S&P today revised upwards its rating on Reliance Industries Ltd (RIL) by a notch to 'BBB+' from 'BBB'

Global rating agency Standard & Poor's (S&P) today revised upwards its rating on Reliance Industries Ltd (RIL) by a notch to 'BBB+' from 'BBB' on greater clarity on company's expansion strategy, with $30 billion lined up for growth.

It is an investment grade rating indicating relatively lesser risk. BBB is defined by S&P as "Adequate capacity to meet financial commitments, but more subject to adverse economic conditions".

"We upgraded Reliance because we believe the company's strategy to grow organically will strengthen its competitive position and support its profitability," S&P said in a statement.

Reliance's articulation of its growth strategy removes the uncertainty regarding the company's use of its high cash balance, it said.

"We now have greater clarity on Reliance's expansion strategy. The company intends to spend more than $30 billion on growth over the next three years, of which at least 75% will be toward its core businesses of refining, petrochemical, and exploration and production (E&P)," said S&P credit analyst Andrew Wong.

Last week, RIL announced a huge natural gas discovery, possibly the biggest find ever, in the flagging eastern offshore KG-D6 block that will arrest the falling output.

RIL and its partner BP Plc of UK encountered 155 metres of gas pay zone in the first exploration well drilled on the block in more than five years.

According to the rating firm, Reliance's petcoke gasification project should improve the company's refining margins, while petrochemical projects should bring in the benefits of higher value addition and vertical integration.

The company's capital spending in E&P will enable it to grow its shale gas business and reverse the fall in production in KG D6 gas field, it said.

The planned capital spending is also likely to result in better operating performance for the company over the next three to four years, it added.

The rating on Reliance continues to reflect the company's large scale, integrated, and efficient oil refining and petrochemicals businesses, and good business diversity, S&P said.

These factors underpin the company's strong and recurrent, although somewhat cyclical, cash flows. The rating also factors in Reliance's exposure to cyclical industries and commodity prices and the concentration of the company's assets in India, it added.

However, it said, the negative outlook on Reliance reflects the outlook on the sovereign credit rating on India.

"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," S&P said.