S&P rates Reliance above sovereign

After Tata Steel and Infosys, the Mukesh Ambani-controlled Reliance Industries Ltd (RIL) has been rated above the sovereign by global rating agency, Standard & Poor's (S&P).

S&P today said raised RIL's long-term foreign and local currency ratings to BBB/Stable from BB+. India's local and foreign currency ratings are both at BB+. Infosys and Tata Steel also enjoy BBB/Stable ratings from S&P.

S&P said the upgrade factors in the demerger of RIL's investments in Reliance Energy, Reliance Capital and Reliance Infocomm. The control of these companies passed on to Anil Ambani following a division of the group as part of settlement between the two Ambani brothers.

The demerger does not entail any material cash outflows from RIL, but the timely completion and continuity of the demerger arrangement is critical for the outlook and ratings.

Last Week, rating agency Moody's had upgraded Reliance foreign currency bonds rating to Baa3 from Ba2 and assigned a local currency issuer rating of Baa3.

S&P's credit analyst Anshukant Taneja said "The upgrade reflects Reliance's competitive position in refining and petrochemicals, its divestment of capital-intensive non-core telecom and power businesses, and an overall moderate financial profile."

RIL has prominent share of exports, high degree of integration with the international capital markets, and positive free cash flow.

The company meets S&P's revised criteria for assigning non-sovereign issuers foreign-currency ratings higher than those of the sovereign. Reliance is also expected to retain these attributes under stress conditions like adverse currency movements, S&P said.

"But the ratings remain constrained by Reliance's exposure to highly cyclical industries, large capital commitments in its refining, exploration and production businesses, and uncertainties in developing its reportedly large gas reserves," Taneja said.

S&P views RIL's Rs 61,700 crore ($13.5 billion) capital expenditure plan with caution in the backdrop of potential softening in the petrochemicals cycle, reduced demand for refined petroleum products, and uncertainties related to the company's upstream gas business.

Lower-than-expected cash flows for funding a part of the capital expenditure could mean still higher borrowings, which would weaken the company's credit protection measures.

"Reliance's current financial position, strong liquidity, and high access to financial resources do mitigate some of these risks", Taneja said. Some flexibility arises from the potential to scale back capital expenditure in case the gas reserves are lower than the company's current estimates.