S&P affirms BBB+ rating of RIL on disciplined spending, resilient earnings

Rating agency S&P Global has affirmed its ‘BBB+’ rating with a stable outlook on Reliance Industries (RIL), saying the company’s leverage is poised to improve and stabilise over the next 12-24 months owing to disciplined spending, asset monetisation, and resilient earnings.

Last week, Facebook agreed to take 9.99 per cent stake in Jio Platforms Ltd, RIL’s wholly-owned subsidiary. “We expect RIL to use the proceeds of Rs 43,574 crore (USD 5.7 billion) to reduce its net debt,” Standard and Poor’s (S&P) said.

The Facebook transaction, it said, will also enhance RIL’s growth potential in the digital business.

RIL will team up with Facebook to accelerate the launch of its JioMart e-commerce platform on Facebook’s WhatsApp application.

“We expect the operating performance of RIL to remain resilient over the next two years, driven by the company’s prominent domestic market position in the digital and retail segments,” S&P Global said.

The agency said it has affirmed its rating on RIL with stable outlook because it believes the “company’s leverage is poised to improve and stabilise over the next 12-24 months owing to disciplined spending, asset monetization, and resilient earnings”.

RIL’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) from its digital and retail segments has grown significantly from Rs 9,300 crore in fiscal 2018 (year ended March 31, 2018) to an estimated Rs 31,500 crore in FY20.

Coupled with investments with key partners, such as Facebook, RIL’s earnings from the digital and retail segments will likely grow at a 15 per cent compounded annualised rate over the next three years, it said.

Separately, RIL has in August 2019 received a non-binding letter of intent from Saudi Aramco (Aramco) for acquiring a 20 per cent stake in RIL’s oil-to-chemicals business.

The rating agency said the finalisation of the Aramco deal would be credit positive for RIL, provided the company largely uses the proceeds to lower its debt.

It expected RIL to continue to follow a prudent financial policy in the current volatile market.

After a peak in the company’s capital expenditure (capex) at Rs 93,600 crore in FY19, the company’s capex is estimated to have declined to about Rs 63,000 crore in FY20.

“We expect RIL to lower its investments over the next two years toward Rs 50,000 crore per year,” it said.

The company is likely to prioritise investments in the digital segment while reducing investments in energy segments to those related to maintenance, the agency said.

RIL’s resilient earnings from its digital and retail segments should offset earnings downside from the energy division.

RIL’s prominent and growing presence in the digital and retail segments should support its EBITDA, S&P said estimating a near-50 per cent EBITDA growth in the firm’s digital and retail segments in FY20.

The segments will account for about 40 per cent of total EBITDA, compared with just 3 per cent in FY17.

“We, therefore, believe the company’s strategy of transforming its upstream energy focus to domestic consumption-driven businesses has been successful,” it said.

Setbacks from shutdowns associated with the COVID-19 pandemic, and possible further downside pressure on India’s domestic market could constrain RIL’s credit profile, it said.

RIL’s prominent domestic market position in the digital and retail segments will reduce its operational volatility because dependence on the cyclical oil refining and petrochemical businesses will subside, it added.

“The stable outlook reflects our expectation that RIL’s strengthening cash flows amid disciplined spending will improve its debt-to-EBITDA ratio toward 2.0x over the next 12-24 months.

“We assume the company will primarily use proceeds from the 9.99 per cent stake sale in Jio Platforms for deleveraging,” it noted. PTI