These include various petrochemical capacity additions, setting up of a coke gasification facility at its refining complex at Jamnagar and accelerating the development of its various upstream discoveries.

Fitch Ratings has affirmed India-based Reliance Industries Limited's (RIL) Long-term foreign currency Issuer Default Rating (FC IDR) at 'BBB-', Long-term local currency IDR (LC IDR) at 'BBB' and National Long-term rating at 'AAA(ind)'. The Outlook on these ratings is Stable. Fitch has also affirmed RIL's National Long-term ratings for its INR20bn and INR130bn non-convertible debenture (NCD) programs at 'AAA(ind)'.

The affirmations follow RIL's recent announcements of investment plans for the petrochemical, upstream oil and gas, telecom and power sector. The timing and value of the company's oil and gas organic expansion projects have not yet been finalised. These include various petrochemical capacity additions, setting up of a coke gasification facility at its refining complex at Jamnagar and accelerating the development of its various upstream discoveries.

RIL has also entered into two separate JVs in the US shale gas industry. Fitch believes that RIL's investments in oil and gas will further strengthen its business profile over the medium-to-long term. Additionally, the shale gas investments provide RIL with geographical diversification and the benefits of an alternative source of gas. In the medium term, the JVs may also give RIL the opportunity to act as an operator, providing valuable experience for when shale gas exploration and production starts in other parts of the world, including India. Moreover, the investments in these JVs are staggered, benefitting cash flow management.

In telecom, RIL plans to invest USD4-5bn in the next three to four years, including the upfront broadband wireless access (BWA) pan-India spectrum fee of USD2.8bn. As India's broadband penetration is extremely low - less than 1% - compared to the international standards, RIL considers broadband to be a huge growth opportunity. However, Fitch believes that the telecom foray increases RIL's overall business risk by exposing it to the highly competitive Indian telecom industry, more so as spectrum has been won after a keenly contested auction.

RIL has also announced that it will enter the power sector by making investments in coal-based, hydro, nuclear (when it is opened for the private sector) and solar power. However, no specific projects have yet been announced. Given India's strong growth prospects and current power deficit, Fitch believes that an entry into the power sector can be a strategic fit with RIL's broad energy business.

RIL's consolidated financial leverage had increased during FY07-FY09 due to debt-funded large capital projects, in particular the  new refinery at Jamnagar and KG-D6 block. However, leverage reduced in FY10 as these projects have started generating significant cash flows. RIL's net adjusted debt/operating EBITDAR was 1.5x at FYE10 (FYE09: 2.4x and FYE08: 2.0x). Given that it had turned free cash flow (FCF) positive in FY10, RIL was expected to announce the next round of growth plans. Overall, the agency believes that the announced plans will have no immediate impact on the ratings, given RIL's healthy cash flow from operations (CFO) and strong liquidity position.

RIL's FC IDR is constrained by India's Country Ceiling. The LC IDR might be downgraded if performance unexpectedly declined and/or if significant new investments were announced such that adjusted net debt/operating EBITDAR exceeds 2.5x on a sustained basis.

RIL is currently an oil refining, petrochemicals and upstream (mainly natural gas at present) company. The company has two highly complex refineries with a combined capacity of 1.24 million barrels per day. In FY10, RIL's consolidated revenue was INR2,037bn with EBITDA margins of 15%. RIL's liquidity position is strong, with cash equivalents of INR219bn at FYE10, part of which have been used to pay the BWA spectrum fee. - IIFL


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