Moody's Investors Service today said robust earnings posted by Reliance Industries in the fiscal year ending March 31 will improve its credit metric, but high cash outflow on capital spending will constrain rating.
Moody's said the firm's telecom arm, Jio had the country's fourth largest subscriber base of 186.6 million but its average revenue per user has declined to Rs 137 in January-March quarter from Rs 154 in the previous quarter.
Reliance Jio Infocomm (RJIL) "continues to generate negative free cash flow, in line with our expectations," it said in an issuer comment on RIL.
Even though the company's reported net debt increased to Rs 1,40,700 lakh crore as of March 31, 2018, compared to Rs 1,19,400 crore a year ago, its credit metrics as measured by net debt/EBITDA declined to 1.9x for fiscal 2018 compared to 2.1x for fiscal 2017, it said adding the improvement in credit metrics is driven by higher earnings from its energy segment.
"Reliance's Baa2 rating remains well positioned. A rating upgrade will require generation of positive free cash flow on a consistent basis and strong credit metrics," it said.
The company's capital spending declined 31 per cent in fiscal 2018, but the creditors for capital spending remains high.
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"This implies that the company will continue to have more cash outflow than its capital spending. Nonetheless, we expect the capital spending will remain focused on its digital services business because the projects in the energy segment are largely complete," it said.
RIL last week reported a 4 per cent increase in its EBITDA in the quarter ended March 31, 2018, taking its quarterly pre-tax profit to over Rs 20,000 crore for the first time. For the 207-18 fiscal, the company reported a 34 per cent increase in its EBITDA to Rs 74,200 crore.
"We expect further improvement in EBITDA levels over the next 12-18 months as the company gets full benefit of its investments in refining and petrochemical businesses, and generate higher EBITDA from its digital services and retail business.
"However, the high cash outflow on capital spending will continue to constrain the company's ratings for at least another 12-18 months," Moody's said.
While the 12 per cent quarter-on-quarter improvement in the petrochemical pre-tax profit in Q4 came on the back of increase in production volumes, further earnings improvement will come from operating efficiency gains in the newly completed projects.
"However, we expect such gains will be offset by lower product delta-margins because of increase in crude oil prices," it said.
RIL's refining pre-tax profit declined 9 per cent in January-March as compared to the preceding quarter on lower margins and throughput. "We expect throughput to increase from quarter ending June 2018," it said adding refining margins would improve as the petcoke gasification becomes fully operational over the next few months.
The benchmark Singapore refining margin, however, will weaken on the back of increasing crude oil prices and will constrain improvement in RIL's refining margin.
For the fourth quarter of 2017-18 fiscal, RIL reported an increase in the segment assets for its digital services of Rs 14,740 crore, a proxy for capital spending, as against its pre-tax profit (EBITDA) of Rs 2,690 crore.
"We expect the digital services business to continue to generate negative free cash flows until at least fiscal 2019 as the company expands its network coverage and capacity further for its mobile business and also rolls out its fiber to home and enterprise services business," it said.