Reliance Industries Ltd (RIL)'s net leverage will remain below 1.0 times in the medium term on strong cash-flow generation across its business segments, even as the India-based conglomerate increases investments in the new energy and new materials business, says a research report.
In the note, Fitch Ratings says, "We expect RIL's earnings before interest, taxes, depreciation and amortisation (EBITDA) generation to remain resilient, improving by 14% in the financial year ending March 2023 (FY23), as it benefits from diversified cash flow streams. We estimate capex, including investments, will remain high at around Rs1 trillion compared with Rs1.19 trillion in FY22, including prepayment of the telecom spectrum liabilities."
According to the rating agency, RIL's net leverage, measured as net debt/EBITDA, should increase marginally to 0.7 times in FY22-23, after improving to 0.6 times in FY21-22 from 1.3 times in FY20-21. "Leverage fell in FY22, largely on the EBITDA increase from the post-Covid-19 pandemic recovery, especially for RIL's oil-to-chemical (O2C) business; in addition, net debt reduction in FY22 was assisted by receipt of the balance proceeds from its rights issue," it added.
Fitch expects RIL's FY22-23 EBITDA to be driven by its telecom and upstream businesses, while the O2C and retail segments would continue to expand and contribute to cash-flow generation.
It says, "The EBITDA of the digital services business, largely telecom, should benefit from the full-year impact of the tariffs raised in December 2021; even as we expect its subscriber base to stabilise around 420 million in FY23 as against 410 million in FY22."
According to Fitch, RIL's upstream oil and gas segment EBITDA should jump to around Rs105bn (billion) in FY22-23 compared with Rs55bn in FY21-22, being assisted by the revision of the applicable ceiling price for the company's KG6 gas to US$9.9 per million British thermal units (mBtu) for the first half (1H) of FY22-23 against US$4.9 in FY21-22. "Our expectation of ceiling prices to remain high in October 2022 reset, in light of the high gas prices so far."
RIL's retail segment EBITDA is expected to rise by about 10% to Rs138bn as the conglomerate expands across physical and digital channels and as consumer sentiment improves, leading to increases in discretionary spending.
Fitch says, "We expect O2C segment EBITDA to improve marginally, supported by high transportation fuel margins amid strong demand recovery in Asia and demand of Asian refined fuels in the European Union (EU) due to sanction concerns on Russia's oil and gas output. RIL's high-complexity refineries and flexibility to optimise crude sourcing and product slate will ease pressure from high feedstock costs on petrochem margins in the region and support segment EBITDA generation."
RIL's long-term local-currency issuer default rating (IDR) of 'BBB+' with a stable outlook has high headroom, as the rating agency expects the company's net leverage to remain well below the 1.5 times sensitivity, barring major debt-funded acquisitions.
"RIL's long-term foreign-currency IDR of 'BBB', one notch above India's sovereign rating at BBB-, reflects our expectation that RIL's hard-currency (HC) external debt-service ratio will remain above 1.0 times over the next 12 months. The negative outlook on RIL's foreign-currency IDR reflects the outlook on India's sovereign rating; should the sovereign IDRs be downgraded, the country ceiling may be revised down in tandem. This would constrain RIL's foreign-currency IDR to one notch above the country ceiling," Fitch concludes.
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