Moody's affirms Reliance Industries' Baa2 ratings, outlook stable

Reliance Industries Ltd's consumer businesses of retail and telecom will support Ebitda growth over the next two years even as earnings from oil and gas business are likely to remain flat, Moody's Investors Service said as it affirmed the company's Baa2 rating.

Moody's has also maintained a stable outlook owing to the expectation that the company's earnings will continue to grow across most of its business segments, such that consolidated credit metrics will remain solidly positioned for its ratings over the next 12-18 months.

"The affirmation of RIL's Baa2 ratings reflects the company's large scale and leading market position across its diverse businesses as well as management's strong execution track record," says Sweta Patodia, Moody's Assistant Vice President and Analyst.

"The rating affirmation also reflects our expectation that continued earnings growth will keep RIL's credit metrics strongly positioned for its current ratings despite high ongoing capital spending," adds Patodia, who is also Moody's Lead Analyst for RIL.

Moody's expects RIL's consolidated Ebitda to grow by around 14 per cent to Rs 1.7 lakh crore (around $21 billion) for the fiscal year ending March 31, 2024 (fiscal 2024) supported by strong growth in its consumer businesses, comprising digital services and retail, as well as its upstream oil and gas segment.

Thereafter, continued growth in the company's consumer businesses will support Ebitda growth of around 10-12 per cent annually over the following two years.

While telecom arm Jio is expected to see its subscriber base steadily grow over the next 12-18 months on the back of the ongoing roll-out of 5G services, retail business will get a boost from continued consumption growth in India backed by its growing population.

"Continued growth in (telecom) subscriber base along with increasing average revenue per user (Arpu) on the back of growing data consumption will underpin 15-20 per cent of annual Ebitda growth for the digital services segment over the next two years," Moody's said.

Similarly, Ebitda from RIL's retail segment, housed under Reliance Retail Ventures Limited (RRVL), is expected to grow by 22-27 per cent over the next two years.

"Earnings from RIL's oil-to-chemicals segment will likely remain flat to fiscal 2023 levels over the next 12-18 months as refining margins normalize after reaching multi-year highs in 2022 while petrochemical spreads remain subdued," it said.

That said, earnings from the upstream oil and gas segment will grow strongly in fiscal 2024 on the back of higher production volumes and strong gas prices. Thereafter, earnings growth for the segment will taper as production levels peak while gas prices stabilize after a significant rally over the past 12-18 months.

RIL's consolidated capital spending will remain high at around $15 billion-$17 billion over the next two years as it spends to set up its new energy segment along with continued investments in existing businesses.

The company is currently setting up its new energy business and hence the segment will not be a meaningful contributor to consolidated Ebitda at least over the next 12-18 months, the rating agency said.

Moody's forecasts RIL's leverage, as measured by adjusted net debt (including spectrum liabilities)/Ebitda, will remain 1.5x-1.6x over the next 12-18 months while retained cash flows (RCF)/net debt will remain around 40-45 per cent over the same period. Such level of credit metrics position RIL very strongly for its current ratings.

"Despite RIL's strong credit metrics, its rating will remain constrained at no more than one notch above India's sovereign rating given the company's increasing exposure to the domestic economy through its consumer businesses. As such, the stable outlook on RIL's ratings is in line with the stable outlook of the Indian sovereign rating," Moody's said.