Reliance Industries Ltd's operating performance is likely to remain resilient over the next two years, as the firm's growing presence in the digital and retail segments will temper softer earnings in the energy business, S&P Global Ratings said on Thursday.
The rating agency affirmed its 'BBB+' rating — equivalent to the sovereign rating assigned to India — to Reliance (RIL) with a stable outlook, reflecting the view that RIL's cash flows will help it preserve its financial profile, despite elevated investments over the next 24 months.
In a statement, S&P said Reliance's expansion plans for the next two years are manageable. Capex will remain elevated, but lower than the levels of fiscal 2023 (ended March 31, 2023).
The company's leverage will remain at a level commensurate with the current rating, it said.
"RIL's operating performance will remain resilient over the next 24 months," it said. "Earnings growth from RIL's digital and retail segments will continue. This will temper weakness in the O2C business." The company, which operates the world's largest single-location oil refining complex at Jamnagar in Gujarat and is India's biggest petrochemical producer, has in recent years diversified into telecom and digital space, including OTT as well as physical and online retail.
"We believe the company's oil-to-chemicals (O2C - a significant contributor to the company's revenue and EBITDA) segment will continue to maintain more stable and superior margins relative to peers'. This is because RIL is one of the largest and most complex refiners globally.
"The company should therefore be able to withstand a likely weakening in refining margins in Asia amid an economic slowdown and a high base," S&P said.
Petrochemical demand, it said, is expected to pick up, with China reopening its economy earlier this year, after a pandemic-induced lockdown. This will drive up petrochemical margins from the lows of fiscal 2023.
"We expect EBITDA for RIL's O2C segment to decline 23 per cent in fiscal 2024, before improving 6 per cent to ₹50,500 crore in fiscal 2025. EBITDA was ₹62,100 crore in fiscal 2023," it said.
Earnings in the digital services segment will benefit from increasing data demand and resultant upgrades to higher-priced telecom plans. Meanwhile, new store openings and the proliferation of e-commerce will support the retail business.
"We project RIL's adjusted annual EBITDA will be ₹1.3 lakh crore to ₹1.5 lakh crore over the next two years, compared with ₹1.4 lakh crore in fiscal 2023. We expect the digital and retail segments to constitute about 60 per cent of RIL's total EBITDA by fiscal 2025, compared with 25 per cent in fiscal 2019," the rating agency said.
"The company's strategy to diversify and dominate its related industries has pushed up its investment spending. We expect this momentum to continue, with annual capital investments of ₹1.1 lakh crore to ₹1.2 lakh crore over the next two years," it said, adding the leverage will remain at a level commensurate with the 'BBB+' ratings.
Resilient earnings and RIL's commitment to keeping its balance sheet in check will support leverage.
"The stable outlook reflects our expectation that RIL's strengthening cash flows and disciplined spending will help the company to preserve its financial profile over the next 12-24 months," it said.
S&P said it could lower the rating if RIL's capital expenditure, including acquisitions in digital or retail businesses, is higher than expected or cash flow projection for the company reduces due to lower earnings stemming from underperformance in any key business.
The rating could be raised if the company demonstrates a track record of conservative financial policy, such that its debt-to-EBITDA stays well below 2x. A higher rating could also require the digital and retail segments' competitiveness to further strengthen.
Meanwhile, a Bernstein Research report revealed India is evolving into a three-player market with Amazon, Walmart and Reliance.