S&P Global recently affirmed the ‘BBB+’ rating on Reliance Industries (RIL), one of India’s largest conglomerates, with a stable outlook. This rating affirmation reflects S&P Global’s positive outlook on the growth prospects and financial stability of RIL despite significant investments expected in the coming years.
In this article, we will delve into S&P Global’s recent affirmation of the ‘BBB+’ rating on Reliance Industries (RIL) and explore the reasons behind their stable outlook for the company.
Affirmation of Rating:
S&P Global confirmed the ‘BBB+’ long-term issuer credit rating on RIL, along with the issue rating on the company’s senior unsecured debt. This affirmation indicates the agency’s confidence in RIL’s ability to maintain its financial profile despite anticipated elevated investments over the next 24 months.
The stable rating outlook reflects S&P Global’s belief that RIL’s cash flows will help the company withstand the impact of increased investments. This outlook highlights the agency’s expectation that RIL’s financial position will remain resilient and stable in the foreseeable future.
Resilient Operating Performance:
S&P Global maintains a positive view of RIL’s operating performance over the next 24 months. Specifically, the agency predicts that RIL’s oil-to-chemicals (O2C) segment, a significant revenue and EBITDA contributor, will continue to exhibit stable and superior margins compared to its peers. RIL’s status as one of the largest and most complex refiners globally positions it favorably to weather potential challenges such as weakening refining margins in Asia due to economic slowdowns and a high base.
The oil-to-chemicals (O2C) segment plays a crucial role in RIL’s overall performance. S&P Global expects this segment to experience a decline of 23% in EBITDA for fiscal year 2024, followed by a 6% improvement to ₹50,500 crore in fiscal year 2025. Despite this projected decline, the earnings growth from RIL’s digital and retail segments will help offset the weakness in the O2C business.
Petrochemical Demand and Margins:
S&P Global anticipates a rebound in petrochemical demand, driven by China’s reopening of its economy after pandemic-induced lockdowns. This recovery is expected to contribute to an increase in petrochemical margins from the lows experienced in fiscal year 2023. The positive outlook for petrochemicals aligns with RIL’s diverse business portfolio and its ability to adapt to changing market conditions.
Earnings Growth in Digital and Retail Segments:
RIL’s digital and retail segments are expected to continue their earnings growth. S&P Global highlights that the increasing demand for data and upgrades to higher-priced telecom plans will benefit the digital services segment. Additionally, the retail business is projected to benefit from new store openings and the proliferation of e-commerce. As a result, S&P Global estimates that the digital and retail segments will constitute approximately 60% of RIL’s total EBITDA by fiscal year 2025, compared to 25% in fiscal year 2019.
S&P Global projects RIL’s adjusted annual EBITDA to range between ₹1.3-₹1.5 lakh crore over the next two years, with a slight decrease from ₹1.4 lakh crore recorded in fiscal year 2023. This projection underscores the agency’s confidence in the continued growth and profitability of RIL’s business divisions.
Manageable Investment Plans:
RIL’s investment plans are substantial, but according to S&P Global, they are manageable. Investment spending has grown as a result of the company’s aim to diversify and dominate adjacent areas. Over the next two years, S&P Global anticipates RIL to continue making annual capital investments of 1.1–1.2 lakh crore. S&P Global thinks that RIL will successfully manage its financial sheet and keep leverage at a level consistent with the “BBB+” ratings notwithstanding these investments.
Leverage and Debt-to-EBITDA Ratio:
S&P Global estimates RIL’s adjusted debt-to-EBITDA ratio to range between 1.8-2 times over the next two years, compared to 1.9 times in fiscal year 2023. This expectation aligns with their downgrade trigger of 2.5 times. The agency believes that RIL’s resilient earnings and commitment to maintaining a healthy balance sheet will support its leverage position.
Potential Rating Downgrade Factors:
S&P Global outlines potential factors that could lead to a rating downgrade for RIL. These factors include higher-than-expected capital expenditure, including acquisitions in the digital or retail businesses, and a reduction in cash flow projections due to underperformance in any key business segment. The sustained deterioration of RIL’s debt-to-EBITDA ratio beyond 2.5 times would also be a cause for concern.
Rating Impact from India’s T&C Assessment:
If S&P Global downgrades its ‘BBB+’ transfer and convertibility (T&C) assessment for India, the foreign currency rating for RIL may also be downgraded. This rating cut is subject to a larger rating cut for India. Conversely, until India’s T&C assessment improves above “BBB+,” an upgrade to RIL’s foreign currency rating is doubtful.
Possibility of Rating Upgrade:
S&P Global indicates that an upgrade to RIL’s local currency rating would require the company to demonstrate a track record of conservative financial policies, ensuring that its debt-to-EBITDA ratio remains well below 2 times. Additionally, a higher rating would necessitate further strengthening of the competitiveness of RIL’s digital and retail segments.
As of 1:30 pm, RIL’s stock was trading 0.21% higher at ₹2,480 on the BSE. The stock’s performance reflects investor confidence in RIL’s growth prospects and the affirmation of its ‘BBB+’ rating by S&P Global.
S&P Global’s affirmation of RIL’s ‘BBB+’ rating and stable outlook signals confidence in the company’s ability to maintain its financial profile amidst elevated investments. The agency highlights the resilience of RIL’s operating performance, particularly in its oil-to-chemicals segment, and expects earnings growth from the digital and retail businesses. RIL’s investment plans are considered manageable, and the company’s commitment to financial discipline is expected to support its leverage position.
About Reliance Industries:
Mumbai serves as the home base for the Indian global corporation Reliance Industries Limited. Energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles are some of its industries.
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