Reliance Industries (RIL), India’s largest company by market capitalisation, had its credit rating outlook downgraded by Standard & Poor’s (S&P) as the company’s debt has increased and profits are likely to be lower due lower demand for oil products and petrochemicals.
The rating agency has also downgraded the credit rating of Indian Oil Corporation (IOC), the country’s largest crude oil refiner and fuel retailer, to ‘BB+’ from ‘BBB-’ on the company’s “weaker liquidity and lack of timely support” by the government, Standard & Poor’s said in a statement. Reliance’s outlook was cut to “negative” from “stable”, but the rating agency retained its ‘BBB’ long-term corporate credit rating on the Mumbai-based company.
An economic slowdown across the world has brought down demand for petroleum products. This has resulted in lower sales of fuels for Reliance Industries from its crude oil refinery, the third largest in the world, and petrochemicals from its plants in Gujarat.
“For example, demand for polypropylene (a petrochemical product) from China has fallen drastically. This has affected Reliance’s sales,” said a Mumbai-based analyst tracking the company. Reliance exports bulk of its polypropylene to China.
It also exports majority of the fuels produced from the 33 million tonne per year refinery in Gujarat to the US, Europe and Africa. The economic slowdown has resulted in the fuel demand growth in the US declining to its lowest in a decade.
“Profitability is expected to be adversely affected by lower fuel demand, especially in developed markets,” the release quoted Standard & Poor’s credit analyst Mehul Sukkawala as saying. Reliance’s gross refining margins fell to $13 per barrel in the quarter ended September, from $15 in the year ended March 2008. The rating agency projects refining margins to decline further to $9-10 in the near term.
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The rating agency said Reliance's outlook could be restated to “stable” if evidence of improved leverage and resilience in the face of the current commodity and refining cycle downturn is seen, the statement said.
The Indian company had cash reserves of about $5.3 billion as on November 30, 2008, according to Standard & Poor’s. Reliance, whose share price has fallen 57 per cent since the beginning of this year, has $3 billion debt and is likely to use about $1.5 billion for working capital needs at its new refinery, it said.
The company’s net profit rose 7.4 per cent in the quarter ended September 2008 compared with the same quarter a year ago. Profits for the quarter ending December 2008 is likely to be lower, analysts said. IndianOil, however, reported Rs 7,047 crore loss during the September quarter. It had made profits of Rs 3,817 crore in the quarter ended September 2007. Analysts expect the company to post losses in the December quarter as well.
“The rating action reflects the deterioration in the company's financial profile and liquidity position, and delays in adequate support from the government of India,” Standard & Poor’s said in a separate statement. The rating agency has lowered the company’s ratings to ‘BB+’ from ‘BBB-’, which is expected to make it more difficult for the company to raise funds from overseas. However, the rating agency has kept its outlook on IndianOil stable.