Fitch Ratings has upgraded India-based
Reliance Industries Ltd's (RIL) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB', from 'BBB-', with a Negative Outlook.
At the same time, the agency has affirmed RIL's Long-Term Local-Currency IDR at 'BBB+' with a Stable Outlook.
The upgrade is driven by our expectation that RIL's hard-currency (HC) external debt-service ratio will remain at above 1.0x over the next 12 months. Fitch's Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria states that a company with a ratio of above 1.0x over at least 12 months can be rated one-notch above the Country Ceiling. India's Country Ceiling is 'BBB-'.
The Negative Outlook reflects the Outlook on India's sovereign rating (BBB-/Negative); should the sovereign IDRs be downgraded, the Country Ceiling may be revised down in tandem. This would constrain RIL's Foreign-Currency IDR to one notch above the Country Ceiling, Fitch Ratings says.
RIL's Local-Currency IDR reflects the company's strong business profile, with market leading positions and diversified cash flow from a mix of oil to chemical (O2C) and consumer businesses, as well as lower net leverage.
Key Rating Drivers
Rated One-Notch Above Country Ceiling: We expect RIL's HC external debt-service ratio, measured as (50% of HC EBITDA from exports + offshore operating EBITDA + offshore readily available cash + offshore committed undrawn credit facilities)/HC external debt service), to remain above 1.0x over the next 12 to 18 months.
The stronger ratio is driven by a 36% reduction in foreign-currency borrowings outside India following pre-payments of USD7.8 billion in the financial year ending March 2021 (FY21). This was achieved using part of the proceeds from the stake sales of digital-service and retail subsidiaries as well as a rights issue. Ratio is also supported by low HC debt maturities in FY22 and FY23 and our expectation of improved EBITDA from O2C segment exports.
Resilient EBITDA: We expect RIL's EBITDA to increase to around INR1.1 trillion in FY22, supported by a recovery in petrochemical spreads, transportation fuel cracks, higher refining throughput and a continued rise in digital services EBITDA. RIL's EBITDA generation of around INR760 billion, although 12% lower yoy, remained resilient amid the coronavirus pandemic, reflecting the benefits of diversity of cash flow generation. Overall EBITDA generation was also supported by a 55% surge in digital-services segment EBITDA, which defied the pandemic-related economic slowdown.
The FY21 drop in EBITDA was largely driven by the O2C segment, which saw a 31% fall in EBITDA due to lower demand, especially during 1HFY21. However, RIL was less affected than local and global peers, as it maintained a high operating rate, assisted by its integration, ability to switch between domestic and export markets along with feedstock and product flexibility.
Cash Flow Diversification: RIL's ratings benefit from cash flow generation across diversified business segments with unrelated industry drivers. This was reflected in FY21, when strong cash flow from telecom mitigated the impact on overall cash generation from the pandemic-affected O2C segment. Consumer businesses, including digital services and retail, contributed around half of overall EBITDA generation in FY21 and we expect this to be the case over the medium term, even as O2C and upstream EBITDA rises.
Deleveraging to Continue; Lower Capex: We expect deleveraging to continue, with net leverage, measured by net debt/EBITDA, falling to around 0.5x in FY22 (FY21: 1.3x, FY20: 2.3x), supported by positive free cash flow generation and the receipt of the balance of funds from the rights issue. Capex is also likely to fall, averaging at INR550 billion a year in FY22-FY25 (FY21: INR1.1 trillion), as most planned capex has been completed. Investment in new energy and materials, including renewable energy, carbon capture and the hydrogen economy, will drive future capex, as RIL aims to be net carbon zero by 2035.
O2C EBITDA to Recover: We expect O2C segment EBITDA to recover and be sustained above INR500 billion (FY21: INR382 billion), supported by a sharp recovery in key petrochemical spreads as well as our expectation of higher throughput and a recovery in cracks for transportation fuels.
Sustained Growth in Telecom: We expect EBITDA from digital services, largely telecom, to increase by 37% in FY22 and by 12%-14% thereafter, contributing about 38% of consolidated EBITDA (FY21: 39%). This should be driven by a wider segment EBITDA margin of around 40%, from 36% in FY21, stemming from increased average revenue per user of INR151 (FY20: INR144) and the addition of 20 million subscribers each year (FY21: 39 million).