Fitch Ratings Raises Reliance Industries’ Outlook To Positive
Fitch Ratings on Friday raised the outlook on Reliance Industries Ltd. to positive from stable due to the company’s potential to further deleverage following its announcement to eliminate its net debt by March 2021.
In a statement, Fitch said it is revising “the outlook on RIL's Long-Term Local-Currency issuer default rating to Positive from Stable and has affirmed the rating at 'BBB'.”
“At the same time, the agency has affirmed the Long-Term Foreign-Currency IDR at 'BBB-' with a Stable Outlook, as RIL's Foreign-Currency IDR is capped by India's (BBB-/Stable) Country Ceiling of 'BBB-',” the statement said.
The revision in the outlook follows RIL announcing plans to sell a 20 percent stake in its oil-to-chemical division to Saudi Arabian Oil Company (Saudi Aramco).
This provides RIL potential to “further deleverage” after eliminating its net debt by the financial year 2020-21.
“We forecast its adjusted net debt/EBITDAR (earnings before interest, taxes, depreciation, amortisation, and restructuring) to reach 1.5 times over the next 18 to 24 months,” Fitch said.
The rating affirmation reflected RIL's strong business profile - a large-scale refinery with a capacity of around 1.2 million barrels a day and dominant market position in petrochemicals.
“The company has completed capex to increase its downstream integration, which has improved feedstock flexibility,” the rating agency said adding it expects RIL's digital-services business, Jio, to continue its strong growth.
Jio has achieved a leading position in its wireless subscriber base, though it is still evolving, as reflected in the recent spinoff of its tower and fibre assets to investment trusts and plans to roll out a fiber-to-the-home business.
“RIL's financial profile is also likely to improve, supported by strong operating cash flow from its expanded petrochemical and refining business. Capex should moderate from fiscal year 2020, with free cash flow turning positive in FY21,” it added.
Fitch said RIL's capex is expected to fall following the completion of most planned projects in its various business segments.
The company's expansion of its fiber business is likely to be the major capex driver over the medium term, along with its investment in the domestic upstream business of around $5 billion in a joint venture with BP plc over the next two to three years.
Free cash flow should turn positive by FY21, driven by robust operating cash flow from its refining, petrochemical and digital-services business along with lower capex, it said.
“We expect the digital-services business to turn FCF positive in FY22, hence it will no longer be a drag on RIL's overall cash flow profile. This should see lower net debt and net leverage, as measured by net adjusted debt/EBITDAR, should improve to around 1.7 times by FY21, from 2.5 times in FY19, without factoring in the proposed investment from Saudi Aramco,” it said.
RIL has entered a non-binding letter of intent with Saudi Aramco to sell a 20 percent stake in its oil-to-chemical division based on a $75 billion enterprise value for the division. Earlier, RIL agreed to form a joint venture with BP where the British firm will invest Rs 7,200 crore for a 49 percent stake in fuel retail network and aviation fuel business.
RIL has also entered into an agreement with Canada's Brookfield Infrastructure Partners L P for an investment of Rs 25,200 crore in Jio's Tower Infrastructure Trust (Reliance Jio Infratel Pvt Ltd).
“RIL's ratings are supported by its strong business profile and robust refining asset quality, which enables it to consistently deliver a GRM above regional benchmarks. The company also has a solid market position in petrochemicals, with robust vertical integration and flexibility in the feedstock. It has also attained a leading position in its telecom business, which we expect will help diversify its cash flow generation streams,” Fitch said.