“We are affirming our ‘BBB+’ long-term issuer credit rating on RIL. We also affirm the issue rating on the company’s senior unsecured debt. The stable rating outlook reflects our view that RIL’s cash flows will help the company to preserve its financial profile, despite elevated investments over the next 24 months,” the rating agency added.
The rating agency maintained that RIL’s operating performance will remain resilient over the next 24 months. It believes the company’s oil-to-chemicals (O2C; a significant contributor to the company’s revenue and EBITDA) segment will continue to maintain more stable and superior margins relative to peers. This is because RIL is one of the largest and most complex refiners globally, S&P Global said, adding that the company should therefore be able to withstand a likely weakening in refining margins in Asia amid an economic slowdown and a high base.
S&P Global expects petrochemical demand to pick up, with China reopening its economy earlier this year, after a pandemic-induced lockdown, which will drive up petrochemical margins from lows of fiscal 2023.
The rating agency expects EBITDA for the O2C segment (EBITDA was ₹62,100 crore in fiscal 2023) to decline 23 per cent in fiscal 2024, before improving by 6 per cent to ₹50,500 crore in fiscal 2025.
Moreover, earnings growth from RIL‘s digital and retail segments will continue, S&P Global said, adding that this will temper weakness in the O2C business.
“Earnings in the digital services segment will benefit from increasing data demand and resultant upgrades to higher-priced telecom plans. Meanwhile, new store openings and the proliferation of e-commerce will support the retail business,” S&P Global said.
“We project RIL’s adjusted annual EBITDA will be ₹1.3- ₹1.5 lakh crore over the next two years, compared with ₹1.4 lakh crore in fiscal 2023. We expect the digital and retail segments to constitute about 60 per cent of RIL’s total EBITDA by fiscal 2025, compared with 25 per cent in fiscal 2019,” said S&P Global.
The rating agency observed that RIL’s investment plans are sizable but manageable. It underscored that the company’s strategy to diversify and dominate its related industries has pushed up its investment spending.
“We expect this momentum to continue, with annual capital investments of ₹1.1– ₹1.2 lakh crore over the next two years,” S&P Global said.
“Nevertheless, we forecast leverage will remain at a level commensurate with the ‘BBB+’ ratings. Resilient earnings and our view that RIL is committed to keeping its balance sheet in check will support leverage. We estimate the company’s adjusted debt-to-EBITDA ratio will be 1.8-2 times over the next two years, compared with 1.9 times in fiscal 2023 and our downgrade trigger of 2.5 times,” said the rating agency.
Read more: RIL share price can rise up to 20% going ahead. Here’s why
S&P Global said it could lower the rating if: (1) RIL’s capital expenditure, including acquisitions in digital or retail businesses, is higher than what it expects; or (2) its cash flow projection for the company reduces due to lower earnings stemming from underperformance in any key business. RIL’s debt-to-EBITDA ratio sustainably exceeding 2.5 times would indicate such deterioration, the rating agency pointed out.
It could also lower the foreign currency rating on RIL if it lowers its ‘BBB+’ transfer and convertibility (T&C) assessment for India (BBB-/Stable/A-3). This will likely happen if the rating agency downgrades India.
Similarly, an upgrade of the foreign currency rating on RIL is unlikely unless the T&C assessment for India rises above ‘BBB+’, said the rating agency.
“We could raise the local currency rating if the company demonstrates a track record of conservative financial policy, such that its debt-to-EBITDA stays well below 2 times. A higher rating could also require the digital and retail segments’ competitiveness to further strengthen,” S&P Global said.
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RIL stock traded 0.21 per cent higher at ₹2,480 on BSE around 1:30 pm.
Disclaimer: The views and recommendations given in this article are those of the rating agency. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 01 Jun 2023, 01:42 PM IST