OREANDA-NEWS. Fitch Ratings has affirmed India-based Reliance Industries Ltd's (RIL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-', and its Long-Term Local-Currency IDR at 'BBB'. The Outlook on the ratings is Stable.

RIL's ratings are supported by its strong business profile - a large-scale refinery with capacity of around 1.4 million barrels per day, and robust asset quality, which enables it to consistently deliver gross refining margins (GRM) above regional benchmarks. The company has a somewhat integrated business, with downstream petrochemical operations as well as upstream, together with strong operating cash flows and ample liquidity.

The company is in the midst of a large capex programme of more than USD30bn that will run through to the financial year ending March 2017 (FY17). The capex is largely in its refining and petrochemical segments and its new telecoms venture in India. The high capex has led to an increase in net financial leverage (net adjusted debt to operating EBITDA), although Fitch expects it to fall as the various projects get commissioned over the next 12-18 months. RIL's operating and expected financial profile places its unconstrained credit profile at the 'BBB' level, which is reflected in the company's Local-Currency IDR; its Foreign-Currency IDR is constrained by India's 'BBB-' Country Ceiling.

KEY RATING DRIVERS

Refining, Petrochemicals Dominate: Refining accounted for around half of the company's EBITDA in FY15, with the petrochemical segment accounting for another 30%; compared with a third for each of these segments and the upstream segment in FY12. These segments' contribution to EBITDA increased due to their higher profitability and the fall in upstream profits following lower gas and oil production and prices. We expect this to remain broadly unchanged with our low oil price assumptions for 2016 and 2017 (see "Fitch Lowers Corporate Oil and Gas Price Assumptions" dated 9 November 2015) and limited positive EBITDA contributions from its new telecoms operations in the short-term.

Strong Refining Assets: RIL's refineries have a high complexity level, which enables the company to be able to use more types of oil in its crude diet and allows it to optimise its product slate. This has enabled the company to consistently outperform regional refining benchmarks. In FY15, its GRM was USD8.6 per barrel (FY14: USD8.1). The company enjoyed higher margins of USD10.5 per barrel in 1HFY16, though these may come down, given industry trends. However, the capex to build the gasification unit is likely to boost GRM by around USD2-2.5 per barrel once the unit is commissioned in FY17. The refining division's profitability will also increase as the company reactivates its retail stations after deregulation of the diesel segment in October 2014.

Capex Completion to Boost Profits: Fitch expects profitability to climb from FY17 following investments in the refining and petrochemical businesses. The success of its new telecom operations remains to be seen. The Indian telecoms sector is highly competitive; we expect RIL's entry to add further pressure on tariffs, especially for data. We think that in the initial period, the company will incur significant costs as it builds up its presence and competes for market share with the incumbent players.

Improving Credit Metrics: RIL's net financial leverage increased to 2.87x at FYE15 from 1.94x at FYE14 due to additional debt to fund capex. However, Fitch expects net financial leverage to decline once the various projects come online from FY17. The liquidity position remains very strong given its adjusted cash and cash equivalents of INR644bn at FYE15, against a total consolidated debt of INR1,609bn. The company also enjoys very good access to domestic and international banking and capital markets.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- GRM for the refining business remains strong in FY16, future profitability aided by new projects undertaken
- Improvements in petrochem profitability from FY17, as new projects are commissioned
- Capex to remain high till FY17
- Telecom venture to start operations from 4QFY16

RATING SENSITIVITIES

Long-Term Local Currency IDR
Positive: Positive rating action is unlikely in the next two years, given RIL's high capex and initial risks associated with its telecoms operations in which the company is heavily investing. However, future developments that may, individually or collectively, lead to positive rating action include:
- net financial leverage below 1.5x on a sustained basis; and
- generation of positive FCF; and
- no material increase in the overall business risk profile of the company

Long-Term Foreign Currency IDR
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- India's Country Ceiling is raised, provided RIL maintains its unconstrained credit profile of 'BBB'

Long-Term Local Currency IDR
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- net financial leverage sustained above 3x, which could arise due to sustained substantial negative FCF beyond FY17.

Long-Term Foreign Currency IDR
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- India's Country Ceiling is lowered