Singapore: Standard & Poor's Ratings Services said today it raised its long-term foreign and local currency ratings on India's Reliance Industries Ltd. (Reliance) to 'BBB' from 'BB+'. The outlook is stable.
"The upgrade reflects Reliance's competitive position in refining and petrochemicals, its divestment of capital-intensive non-core telecom and power businesses, and an overall moderate financial profile," said Standard & Poor's credit analyst Anshukant Taneja.
The ratings factor in the demerger arrangement, as approved by shareholders and creditors of the company, which does not entail any material cash outflows from Reliance. The timely completion and continuity of this demerger arrangement is critical for the outlook and ratings.
With a prominent share of exports, high degree of integration with the international capital markets, and positive free cash flow, Reliance meets Standard & Poor's revised criteria for assigning non-sovereign issuers foreign-currency ratings higher than those of the sovereign, which in this case is India (BB+ / Stable / B). Reliance is also expected to retain these attributes under stress conditions like adverse currency movements.
"But the ratings remain constrained by Reliance's exposure to highly cyclical industries, large capital commitments in its refining, exploration and production businesses, and uncertainties in developing its reportedly large gas reserves," said Taneja.
Standard & Poor's views the Rs617-billion ($13.5 billion) capital expenditure plan of Reliance with caution, given potential softening in the petrochemic al cycle, reduced demand for refined petroleum products, and uncertainties related to the company's upstream gas business.
Lower-than-expected cash flows for funding a part of the capital expenditure could mean still higher borrowings, which would weaken the company's credit protection measures. "Reliance's current financial position, strong liquidity, and high access to financial resources do mitigate some of these risks", said Taneja.
Some flexibility arises from the potential to scale back capital expenditure in case the gas reserves are lower than the company's current estimates.
Reliance is India's largest private-sector company. Its two main lines of business are oil refining and petrochemicals production, accounting for about 53 per cent and 45 per cent, respectively, of revenue for the fiscal
year ended March 31, 2005. Its telecommunications, electricity generation and distribution and financial services activities are in the process of being demerged from the company.
Reliance had revenues of Rs731 billion and net income from continuing operations of Rs75.7 billion in fiscal 2005.