Its Baa2 foreign currency issuer and bond ratings remain at the country ceiling, and have a stable outlook.
Compared to a year ago, RIL's consolidated revenue for FYE3/2014 grew 9.3% to INR4,463.3 billion ($74.5 billion) and its consolidated EBITDA increased 7.1% to INR438 billion ($7.3 billion).
"RIL's strong downstream refining business was the key driver of the company's strong full year operating performance and more than offset the continued earnings contraction of its domestic upstream operations. Its refining EBIT grew 3.4% to a record of INR132.2 billion driven by stable middle distillate crack spreads and the recovery in gross refining margins (GRM) towards the end of the year," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.
In addition, its petrochemical earnings were robust, growing 17.5% to INR 86.1 billion on the back of margin expansion across polymers and downstream polyester products.
The company's GRM rebounded to $9.3/barrel (bbl) in the fourth quarter to average $8.1/bbl for the year compared to $9.2/bbl in FYE3/2013.
Despite the lower GRM which was in line with the decline in regional refining benchmarks, RIL continued to maintain a high average utilization rate of 110% and processed 68.0 million tons of crude during the year.
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RIL's ailing domestic E&P segment remains the main drag on the company's earnings. Its upstream EBIT declined sharply to INR16.3 billion in FYE3/2014, compared to INR28.9 billion in FYE3/2013 and INR52.5 billion in FYE3/2012. This was mainly due to the continued poor operating performance at its KG-D6 field, which reported an average production of 14 million metric standard cubic meters per day (mmscmd), which was just 17.5% of its daily target of 80 mmscmd.
"In addition to the high execution risk at the KG-D6 block resulting from the site's geological complexity and natural production decline, RIL has faced a further setback given the Indian government's recent decision to delay the increase in natural gas prices until after the elections in May. It remains uncertain whether gas prices will ultimately be increased as the decision will be made by the new government," adds Halan, who is also Lead Analyst for RIL.
Moody's had estimated RIL's revenues to increase by $300-500 million annually had the price hike been implemented on April 1, as scheduled.
On the back of strong growth momentum in RIL's shale gas production in the US, its segment EBITDA increased by 37% year-on-year to $659 million in FYE3/2014.
"With the continued growth of its shale gas production in the US, RIL's liquids-rich, unconventional resource segment has gradually grown to be a meaningful contributor of the company's overall earnings mix. We expect further production growth in the next 2-3 years to boost the segment earnings which made up about 7% of RIL's consolidated EBITDA in FYE3/2014," says Halan.
In the telecommunications space, RIL acquired the right to use the 1,800MHz spectrum in 14 key circles across India and the pan-India 2,300 MHz spectrum. Moody's expects RIL's focus to remain in providing joint data and voice services instead of competing solely as a voice provider in the already-saturated market. At the same time, Moody's expects RIL to share telecom infrastructure with other providers to minimize related capex.
Moody's estimates RIL's standalone debt/EBITDA for FYE3/2014 to be 2.3x, which is in line with its adjusted leverage for the two prior years and supports its Baa2 rating.
The company's liquidity position was strong as of 31 March 2014, with substantial cash and cash equivalent of INR881.9 billion and consolidated debt of INR1,387.6 billion.
RIL's local currency rating could be upgraded if the company a) successfully executes its capex plans and manages to improve its margins further in its refining and petrochemicals segment; or b) substantially improves contribution from its Indian exploration and production business. Credit metrics that support an upgrade include retained cash flow/debt of above 30%-35% and EBIT/interest over 8.0x, both on a sustained basis.
However, the outlook on the local currency rating could revert to stable, if: 1) RIL fails to resolve its disputes with regulators such that it fails to increase its gas production over the next 12 to 18 months or get the higher gas price; 2) RIL undertakes transformational debt-funded acquisitions; or 3) RIL pursues growth that entails higher business risk and is not part of its current petroleum, retail or telecom data strategy. Additionally, if its credit metrics fails to improve after the completion of the expansion projects, such that retained cash flow/debt remains below 30%, then the outlook would revert to stable. RIL's foreign currency rating may be downgraded if the country ceiling for foreign currency bonds for India is downgraded.
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