Potential to upgrade rating of Reliance Industries, says S&P Global Ratings

There is a potential for upside to Reliance Industries Ltd provided it operates at lower leverage and strengthens non-energy revenue streams, S&P Global Ratings said on Tuesday.

S&P had last week raised the issuer credit ratings of Reliance as well as companies such as Oil and Natural Gas Corp (ONGC), NTPC and Tata Power to 'BBB' from 'BBB-' following upgrade in India's sovereign rating to 'BBB/A-2' from 'BBB-/A-3' on economic resilience and sustained fiscal consolidation.

"There is a potential for upside in RIL's rating. It is at 'BBB+'... This (rating going up by a notch) would require stand alone credit profile to improve. For this, what we have said we need a continuation of the company to operate at a lower leverage, and will likely need a strengthening on the business side particularly contribution from non-energy revenues because these are less volatile," said Neel Gopalakrishnan, credit analyst, S&P Global Ratings, on Tuesday.

"A combination of these factors could "push the rating up and it is something to watch for the next year or so," he said.

Last week, S&P had stated that its stable outlook on the company's rating "reflects our expectation that Reliance Industries' strengthening cash flows and disciplined spending will help the company to preserve its financial profile over the next 12-24 months".

The rating agency could however lower the rating if Reliance's capital expenditure, including acquisitions in digital or retail businesses, is higher than expected or cash flow projection for the company reduces due to lower earnings stemming from underperformance in any key business.

Reliance's debt-to-EBITDA ratio sustainably exceeding 2.5x would indicate such deterioration.

"We could upgrade the rating if the company demonstrates a record of conservative financial policy, such that its debt-to-EBITDA stays well below 2x. A higher rating could also require a greater share of revenue from non-energy segments," it had said.