RIL's $6-bn capex will delay deleveraging; investments credit neutral: S&P

Rating agency S&P has said the Rs 40,000-crore capex that Reliance announced last week in deep water gas fields will delay its deleveraging, but maintained that the investment plan is credit neutral.

It expects that investment along with the fledgeling telecom venture, into which RIL has pumped in over Rs 1.3 lakh crore so far, will contribute a 50 per cent increase in operating income.

"The proposed $6 billion investments will slightly delay Reliance's deleveraging as any meaningful improvement in the leverage ratio will depend on stronger cash flows from new projects in refining and petchem and its telecom venture generating meaningful EBITDA in fiscal 2018 and thereafter," S&P said in a weekend note.

"We expect the EBITDA from these two businesses (new gas fields and telecom) to grow by about 50 per cent in fiscal 2019 over fiscal 2017. We also expect telecom business to attain material scale for paid subscribers resulting in contribution of about 20 per cent of consolidated EBITDA in fiscal 2019," S&P said.

Reliance had last week announced Rs 40,000 crore or about $6 billion capex through a joint venture with its British partner BP Plc to develop three gas fields in the KG-D6 block.

Noting that RIL's debt-to-EBITDA ratio of 3.3x as of fiscal 2017 is above its expectation of sustainably below 2.5x for the rating, the agency said it anticipates the ratio to improve to below 2x on the back of EBITDA growth from petchem and refining segments.

It can be noted that despite sitting over nearly Rs 0.8 lakh crore cash, RIL is one of the largest borrowers with over Rs 1.9 lakh crore in debt, most of which is in forex.

As of March 2017, its outstanding debt rose to Rs 1,96,601 crore from Rs 1,94,381 crore in December 2016, while its cash pile jumped to Rs 77,226 crore on March 31 from Rs 76,339 crore in December 2016.

In FY17, RIL reported its highest annual net profit of Rs 29,901 crore, up 18.8 per cent over the previous year.

The projected EBITDA improvement should create some buffer for RIL to accommodate the new investments within its cash flow and leverage ratio expectations.

The RIL, with 60 per cent stake in the joint venture, will invest about $3.6 billion. This is manageable with its EBITDA, which the agency expects to grow to more than $10 billion annually from fiscal 2018.

"We believe RIL's capex in non-E&P businesses will peak in fiscal 2018 and taper off after completion of projects in petchem and refining and investment in telecom. However, spectrum purchases remain uncertain," it said.

It expects RIL's capex to peak in fiscal 2019 or after. Its gas production from the new fields will be eligible for a formula-driven gas price for difficult fields (fields in deep waters, with high pressure and temperature) and prices are currently about $5.50 per mmBtu.

Assuming gas production reaches 12 million cubic meters a day (mmscmd) by 2020, RIL's share of EBITDA from these investments could still be below $500 million a year, the report said.