Reliance EBITDA improves on rebound; balance sheet strengthened: Moody's

Oil-to-telecom-to-retail conglomerate Reliance Industries has shown improvement in pre-tax profits in the September quarter as the Indian economy rebounded and the firm's asset monetisation strengthened balance sheet, Moody's Investors Service said on Monday.

Reliance Industries has reported a 7.9 per cent EBITDA growth for the July-September quarter compared with the preceding three months.

"Strong performance in digital services, and earnings recovery in the petrochemical and retail segments underpinned the improvement in consolidated earnings, a credit positive," Moody's said in a note.

Stating that the firm's earnings are expected to gradually recover to pre-pandemic levels, the rating agency said RIL's credit metrics will remain strongly positioned for its Baa2 rating because of its zero net debt status on a reported basis.

The digital services segment, which includes India's youngest but largest telecom operator Jio, reported an 8.7 per cent EBITDA growth during the second quarter of FY2021, taking its quarterly EBITDA to more than USD 1 billion, while its subscribers now number more than 40 crore.

"We expect earnings within digital services to grow over the next 12-18 months on the back of further improvement in profitability and a ramp up of other services within the segment, such as home and enterprise broadband services," it said.

Reliance's refining segment had a 21.4 per cent decline in reported EBITDA in the quarter compared with the preceding quarter. "The drop in earnings was due to lower refining margins and reduced capacity utilisation because of refinery maintenance."

"We expect refining margins to remain weak at or near current levels for the next six to 12 months because of weak product demand and already high inventory levels," Moody's said. "However, we expect refining throughput to improve as economic activity gathers pace."

Nonetheless, as the number of coronavirus infections grow in India, a second wave of lockdowns cannot be ruled out, it said. "This poses a risk to our expectations on further recovery in throughput levels."

Moody's expected earnings from the refining segment to improve from current levels, but full-year earnings for fiscal 2021 will still be 17-18 per cent lower compared with fiscal 2020.

The firm's petrochemical segment reported a 34.6 per cent EBITDA growth during the second quarter of FY2021 compared with the preceding quarter.

"The earnings improvement during the quarter was underpinned by higher volumes supported by a favourable product mix. At the same time, product spreads improved during the quarter although they were lower compared with prior years," the rating agency said expecting petrochemicals production volumes to continue to improve, underpinned by strong domestic demand.

Earnings within the retail segment almost doubled during the second quarter of FY2021 compared with the previous quarter on the back of the reopening of retail stores and increase in shopper footfalls following gradual easing of lockdowns.

"We expect the shopper traffic and sales to gather further momentum in third quarter of fiscal 2021 because of India's upcoming festive season and improving consumer sentiment," it said.

Earnings within the segment will also be supported by new store openings following easing of lockdowns.

However, similar to the refining segment, the possibility of a second wave of lockdowns poses a risk to earnings growth within the segment, it said.

RIL, Moody's said, has already reduced its net debt to zero following announced stake sales in its retail and digital services segments, as well as a rights issue offering.

Of the USD 33.4 billion of fund raising initiatives announced since April 2020, the company has already received around USD 23.6 billion while another USD 9.8 billion is expected to be received over the next few quarters.

Additionally, the company's capital spending will decrease from historical levels as the bulk of the spending in the digital services is now complete.

"As such, we expect that the company's existing cash and internal cash flow generation of around USD 8 billion-USD 9 billion will be sufficient to meet its future spending needs," the agency said.

Meanwhile, proceeds from any further asset monetisation will accumulate on the balance sheet, thereby strengthening its capital structure and enhancing its financial flexibility, it said.

Consequently, credit metrics will remain strongly positioned for its current Baa2 rating over the next 12-18 months, Moody's added.