Moody’s cuts Reliance outlook to negative

Global rating agency Moody’s Investors Service has affirmed Reliance Industries’ ‘Ba2’ ratings for senior unsecured debt...

Global rating agency Moody’s Investors Service has affirmed Reliance Industries’ ‘Ba2’ ratings for senior unsecured debt securities, but changed the outlook to negative from stable. The downgrade has happened at a time when Moody’s had in November put India’s ‘Ba2’ foreign currency debt rating and ‘Ba3’ foreign currency bank rating on review for a possible upgrade, citing the country’s healthy external financial situation.

In a statement released on Monday, Moody’s said the change in outlook reflected concerns about the Reliance group’s recent aggressive expansion. Reliance Industries is the nation’s biggest petrochemicals maker and a leading refiner.

Last month, group company Reliance Infocomm announced it had launched limited radius mobility services at an expenditure of Rs 25,000 crore.

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Reliance’s shares were down 0.23 per cent at Rs 294.55 on the Bombay Stock Exchange, whose key index was up 8 points. ‘The rating action reflects concerns relating to the aggressive internal and external expansion by the Reliance group and the growing business and financial risk associated with the rapid expansion,’ Moody’s said in a statement in London.

Observing that Reliance’s recent expansion was ‘significantly outside its well protected, strong margin petrochemical business’, it said, adding ‘Moody’s believes that this rapid expansion into liberalising and more competitive markets will lead to weaker profitability and operating cash flow margins.’

It cited refining and telecom operations in particular as reasons for weaker operating cashflow margins and said that expansion at the same time would increase the investment levels.

‘It is unclear at this stage how much of the financing for these various investments will be taken on Reliance Industries balance sheet,’ the statement said, while clarifying that group’s telecommunications companies — Reliance Infocomm and Reliance Telecom — are only treated as non-consolidated associate investments. It also wondered as to how much would be debt-financed via Reliance Industries associate companies and how much would be provided by strategic or financial partners.

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‘In recent weeks and months, in addition to acquiring a significant minority position in the country’s second-largest petrochemcials firm (IPCL) for a little over $500 million, Reliance has been expanding (or has announced its intentions to expand) significantly outside its well-protected, strong-margin petrochemicals business,’ Moody’s said.

Moody’s has said that this expansion has included merging with its sister company Reliance Petroleum (one of the country’s leading petroleum refiners); launching its new low-cost telecoms service across India with the goal to cover all cities and villages domestically in the near future; announced its intentions to build a nationwide petrol retailing network (of at least 1,500 stations); increased its stake in its power generation and transmission company, BSES; and made a major gas discovery in Andhra Pradesh.

When contacted, an RIL spokesperson said in a statement “Last week S&P, a leading international rating agency, has reaffirmed RIL’s credit rating at BB, the same level as India’s rating, and has also reaffirmed that RIL’s rating is constrained by the sovereign ceiling.”