Reliance Industries Limited — Moody’s assigns Baa2 rating to RIL’s proposed USD bonds

Rating Action: Moody’s assigns Baa2 rating to RIL’s proposed USD bondsGlobal Credit Research – 04 Jan 2022Singapore, January 04, 2022 — Moody’s Investors Service has today assigned a Baa2 rating to the proposed USD-denominated senior unsecured bonds to be issued by Reliance Industries Limited (RIL). The outlook on the rating is stable.RIL will use the bond proceeds for refinancing. »RIL’s Baa2 ratings reflect the company’s large scale and dominant market position across its diverse businesses, its management’s strong execution track record and our expectation that its credit metrics will remain strongly positioned for its Baa2 rating, despite its planned investments in clean energy and other business segments, » says Sweta Patodia, a Moody’s Analyst. »RIL’s high dependence on the Indian economy through its digital services and retail businesses constrains its rating to one notch above that of the Indian sovereign rating, » adds Patodia, who is also Moody’s lead analyst for RIL.RATINGS RATIONALERIL benefits from diversified earnings sources that have little or no correlation, given its presence in the refining and petrochemicals, digital services, and consumer retail segments. These three segments together generated around INR944 billion ($12.6 billion) or 86% of RIL’s consolidated EBITDA for the 12 months ended 30 September 2021.The company’s digital services and consumer retail businesses are housed under separate subsidiaries, while its refining and the petrochemical business — also known as the oil-to-chemical (O2C) segment — is held at the holding company level.RIL’s announcement to increase tariffs for its digital services business is positive for the telecommunications industry, while the easing of pandemic-related disruptions will support demand for oil and gas as well as increase consumer spending. These trends bode well for RIL’s various business segments and will keep earnings strong over the next 12-18 months.A resurgence of coronavirus infections due to the emergence of new variants could result in fresh lockdowns and affect the company’s O2C and retail earnings.RIL’s earlier announcements to transfer its gasification undertaking into a wholly-owned subsidiary while reevaluating the planned transfer of its O2C business to a separate subsidiary will not have any impact on the company’s credit profile.RIL’s adjusted net debt/EBITDA was estimated at around 1.1x as of 30 September 2021, compared with the rating downgrade trigger of net debt/EBITDA at 3.0x. In addition, Moody’s expects the company to generate sufficient cash flows from operations each year to fund its capital spending.The stable outlook reflects Moody’s expectation that the company’s earnings will continue to improve over the next 12-18 months across all its business segments, such that its credit metrics will remain strongly positioned for its ratings.The stable outlook is also in line with the stable outlook of the Indian sovereign rating and reflects Moody’s view that RIL cannot be rated more than one notch above the Indian sovereign.RIL has excellent liquidity. As of 30 September 2021, the company had adjusted cash and cash equivalents, including quoted marketable securities, of about INR1.9 trillion ($25.6 billion).Its existing cash, along with expected cash flows from operations, will be sufficient to cover its cash outflows for capital spending and debt maturities in the next 18 months.In November 2021, RIL received around INR266 billion in proceeds from the final call on its rights issue, which further enhances its liquidity.The company’s liquidity is further supported by its strong banking relationships and access to domestic and international capital markets.ENVIRONMENT, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONSRIL is exposed to increasing environmental regulations and safety risks through its refining and petrochemical businesses, which are among the few sectors that Moody’s has identified as facing very high environmental risks. These risks are somewhat mitigated by the company’s good track record of environmental compliance and solid operational capabilities.The company has also announced a $10 billion capital spending program in clean energy investments to be incurred over the next three years, in line with its target to achieve carbon neutrality by 2035. It has recently announced a series of acquisitions in the clean energy sector as part of this investment program.RIL’s petrochemical business is exposed to increasing social risks stemming from changing consumer preferences and the Indian government’s initiative to reduce the consumption of single-use plastics. This risk is largely mitigated by RIL’s diverse petrochemical business, which produces not only plastics with advanced applications, but also elastomers and polyester yarns and fibers.Moody’s also regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. The virus outbreak has led to a decline in demand for transportation fuel, weakened refining margins, and a slowdown in consumer retail spending, which have affected RIL’s earnings performance.RIL is also exposed to governance-related risks because of its concentrated ownership by its promoter, which holds a stake of around 50.6% in the company. However, RIL’s status as a listed company and the fact that independent directors form the majority of the company’s board mitigate this risk.In addition, the investments made by several major global investors and technology firms in RIL’s digital services and retail businesses support the company’s higher governance standards.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSCredit metrics indicative of a higher rating level include retained cash flow (RCF)/net debt above 25%, net debt/EBITDA below 2.0x, and EBITDA/interest above 7x, all on a sustained basis.However, RIL’s ratings can be upgraded only if the sovereign rating is upgraded, because the company’s ratings are capped at one notch above the sovereign’s.RIL’s credit metrics are extremely strong for its sovereign-constrained rating, and only a very substantial deterioration in the credit metrics could pressure its fundamental credit profile. Such deterioration could occur if (1) there is a protracted weakness in its operations, which results in significantly lower earnings, or (2) RIL increases its capital spending or makes large acquisitions or shareholder distributions that substantially increase its net borrowings.Credit metrics indicative of such a scenario include RCF/net debt below 20%, adjusted net debt/EBITDA above 3.0x, and EBITDA/interest below 4x.Moody’s could also downgrade RIL’s rating if the Indian sovereign rating is downgraded.The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125855. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Reliance Industries Limited (RIL) is an Indian conglomerate with a presence in the refining and marketing, petrochemical, digital services, and retail businesses. It also has a small but growing portfolio of upstream oil and gas assets.The company’s digital services and consumer retail businesses are housed under separate subsidiaries, while its refining and the petrochemical business is held at the holding company level.RIL is listed on the Indian stock exchanges. For the fiscal year ended 31 March 2021 (fiscal 2021), the company reported consolidated revenue of INR4.9 trillion and EBITDA of INR976 billion.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Sweta Patodia Analyst Corporate Finance Group Moody’s Investors Service Singapore Pte. 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