The long-term issuer rating of Reliance Industries Limited (RIL) has been affirmed at ‘AAA’. In addition to this, India Ratings & Research (Ind-Ra) also affirmed the company’s non-convertible debentures (NCDs) at ‘AAA’, hereby exhibiting a stable outlook.
What does this Affirmation mean for RIL?
This affirmation essentially reflects the company’s diversified and strong presence in the Indian oil and gas sector. It also highlights the vertically integrated and cost-efficient operations across the entire supply chain. RIL’s exploration and production segment currently has stake in 3 operating oil blocks within the country and in some active shale gas assets within the United States.
The company also has stake in 8 domestic and 3 international developing oil blocks. RIL is the second largest refiner in the country by capacity and has the highest production complexity. In addition to this, it is the marketing leader in the country’s petrochemical segment.
RIL’s Performance in FY14
In FY14, RIL’s refining operations contributed 50% to the Earnings before Interests and Taxes (EBIT). Meanwhile, the petrochemicals business earned 31.5% of the revenues and the oil and gas exploration and production business contributed 10.5% to the EBIT.
The decline in contributions from the oil and gas segment was because of the fall in natural gas production in the Krishna Godavari D6 block. In addition to this the decline in gross refining margins per barrel also contributed to this decline.
Production was reduced in the PannaMukti oil block because of a shutdown for maintenance work. Furthermore, the Tapti oil block also posted reduced production owed to reserves that were lower than estimated. This resulted in a fall in the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) by 1.7% when compared with FY12. The reduction in margins was partly offset by the depreciation of the rupee and improved petrochemical margin.
RIL’s Capacity to Mitigate Risks
Even though the company is exposed to oil commodity price cycles, its diverse and integrated business structure allows RIL to maintain a consistent and stable operating profit. Furthermore, in spite of the volatility in the gross refining margins and petrochemicals segment, profitability is mitigated through the high complexity of the refineries and the highly diversified petrochemical product portfolio.
The Ind-Ra Ratings
The ratings take into account RIL’s strong liquidity due to the company’s ability to constantly earn stout positive cash flow from its operations. The company has been able to maintain an average consolidated cash flow margin of about 9.5% between FY11 and FY14. This is further supported with its strong working capital cycle of 8 days in FY14 along with the robust EBITDA of INR349.4 billion. In addition to this, on 31st March 2014, the company also posted free cash and equivalent of INR893.5 billion along with undrawn committed term facilities of $5 billion.
The ratings also reflect the company’s credit metrics along with the fact that interest income is consistently higher than the interest expenses. The ratings are further supported by the strong access RIL has to the capital markets, its financial flexibility and sturdy refinancing.