Fitch Ratings on Thursday said it has upgraded Reliance Industries Ltd’s rating to ‘BBB+’ from ‘BBB’ as the company’s financial profile has improved following sale of nearly 25 per cent stake in Jio and Rs 53,124 crore equity raise. “Fitch Ratings has upgraded India-based RIL’s long-term local-currency issuer default rating (IDR) to ‘BBB+’ from ‘BBB’. The Outlook is Stable,” the ratings agency said in a statement. At the same time, the agency has affirmed RIL’s long-term foreign-currency IDR at ‘BBB-‘ with a stable outlook. ‘BBB’ ratings indicate that expectations of default risk are currently low.
“The upgrade of the local-currency IDR is driven by our expectations of an improvement in RIL’s financial profile, with net debt reductions underpinned by proceeds from a stake sale in its subsidiary, Jio Platforms Ltd, and a rights issue, and our forecast of positive free cash flow (FCF) during the financial year ending March 2021 (FY21),” it said.
Fitch forecast that RIL’s net debt/EBITDA will fall to 0.6x in FY21 from 2.3x in FY20. “RIL’s local-currency IDR also reflects its strong business profile with a market leading position and diversified cash flows from a mix of oil to chemical and consumer businesses,” the statement said.
Fitch kept the stable outlook on RIL’s foreign-currency IDR despite the revision in Indian sovereign’s rating outlook to ‘negative’ from ‘stable’ on June 18, as it expected the company’s hard currency (HC) external debt-service ratio to improve over the next 12 months. “Our expectation is driven by RIL’s ability to reduce its foreign-currency borrowings outside India from the proceeds of the stake sale in Jio Platforms and its rights issue,” it said.
Fitch said proceeds of Rs 1.15 lakh crore from 24.7 per cent stake sale in Jio Platforms and the completion of its Rs 53,124 crore rights issue, with Rs 13,300 crore in cash received to date and the balance in FY22, would cut RIL’s FY21 net leverage to well below 1.5x. It expected RIL’s capital expenditure (capex) to fall from FY21 following the completion of most of its planned spending in its various business segments.
The company’s expansion of its fibre business is likely to be the major capex driver over the medium term, along with its investment in the domestic upstream business in a joint venture with BP plc over the next two-to-three years.
FCF should turn positive in FY21, the first time since FY13, driven by robust operating cash flows, especially from its consumer businesses, and lower capex, it said.
Fitch expects RIL’s oil-to-chemical segments to face volume and margin headwinds due to a weakening of demand for refined products and petrochemicals in 2020, with gradual recovery through 2021 to pre-COVID-19 levels. Its telecom business, Reliance Jio Infocomm Ltd (Jio), is likely to be less affected by the coronavirus lockdown and contribute about 35 per cent of consolidated EBITDA in FY21 (from 26 per cent in FY20).
Fitch said Jio’s average revenue per user (ARPU) is expected to rise to Rs 147 in FY21 from Rs 131 in Q4 FY20. Also, 30 million subscribers are likely to be added in FY21 after 80 million additions in FY20. The rating agency expects RIL’s retail segment revenue, excluding the digital-service business, to rise by 10 per cent in FY21 (compared to 15 per cent in FY20). “Retail revenue would be affected by lower footfall in its physical retail stores and a drop in spending on discretionary electronics and lifestyle products. “However, the impact will be mitigated by higher grocery sales and its partnership with Facebook, which allows users to buy goods and services using WhatsApp and Facebook Messenger,” it added.