By Mahaveer Jain

India Ratings and Research (Ind-Ra) has assigned Reliance Industries Ltd.’s INR50bn commercial paper (CP) programme a Short-term ‘IND A1+’ rating. A list of outstanding ratings is at the end of this commentary.

KEY RATING DRIVERS

The ratings reflect RIL’s strong and diversified presence in the Indian oil & gas sector with vertically integrated and cost-efficient operations across the refining and petrochemical verticals. RIL is the second largest refiner in India by capacity with high complexity and also is the market leader in the Indian petrochemical industry. The company’s exploration and production segment has a stake in three operating oil blocks in India as well as in active shale gas assets in the US. It also has a stake in developing oil blocks, six domestic (including two coal bed methane blocks) and five international. 

During 1HFY16, refining operations contributed 65% to the consolidated EBIT, followed by the petrochemical business and oil & gas exploration and production at 29% and 2%, respectively (1HFY15: 54%, 30% and 13%). The contribution from refining operations increased due to strong gross refinery margins which were supported by robust light distillates cracks. The petrochemicals division posted a strong improvement in EBIT due to improved profitability in the naphtha cracking division and strong volume growth. RIL’s overall EBIT margin (excluding other incomes) increased to 9.9% in 1HFY16 (1HFY15: 6.1%). 

The ratings factor in RIL’s strong liquidity due to its ability to consistently earn robust positive cash flow from operations with average consolidated cash flow from operations margin of near 9.5% over FY13-FY15. This is supported by a strong working capital cycle (FY15: negative seven days) and robust EBITDA (FY15: INR373.6bn). Also, the company reported cash and equivalent of INR857bn at 1HFY16. 

RIL is exposed to oil commodity price cycles, however its diverse and integrated businesses help it mitigate the volatility in operating profits (FY11-FY15: EBITDA above INR300bn). Also, volatility in gross refining margins and petrochemical division’s profitability is mitigated by the high complexity of its refineries and a significantly diversified petrochemical product profile. However, RIL remains exposed to significant regulatory risk and is involved in arbitration proceedings regarding lower-than-estimated production from the KG-D6 block. Any adverse decision might affect the profitability of the segment.

The ratings also reflect RIL’s strong interest coverage ratios with interest income almost covering the entire interest expenses. However, its FY15 net leverage increased (net adjusted debt/funds from operations) to 2.4x (FY14: 1.6x) due to substantial capital expenditure. This is part of the announced INR2,000bn capex programme primarily to strengthen its refining and petrochemical verticals as well as to roll out pan-India telecom and broadband services. The agency expects the net leverage to further increase during FY16-FY17; however, it is likely to remain within comfortable limits with EBITDA contribution from new capacities and vertical. 

The ratings are supported by the company’s strong access to capital markets and its robust refinancing and financial flexibility.


RATING SENSITIVITIES

Unexpected debt-funded expansion or acquisition resulting in significant deterioration in RIL’s credit metrics could lead to a negative rating action. 


COMPANY PROFILE

RIL is an oil refining, petrochemicals and upstream (mainly natural gas at present) company. It has two highly complex refineries with a combined capacity of 1.24 million barrels/day. It had total proved reserves of 2.95 trillion cubic feet of gas equivalent at its shale assets at end-December 2014.

RIL’s ratings (including the above) are as follows: 

- Long-Term Issuer Rating: ‘IND AAA’; Outlook Stable
- INR12.7bn (reduced from INR150bn) non-convertible debenture (NCD): Long-term ‘IND AAA’
- INR50bn CP: Short Term ‘IND A1+’



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001768

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121