RIL’s high cash outflow on capital spending a rating constraint: Moody’s

High capital spending might prove to be a rating constraint for Mukesh Ambani-led Reliance Industries Ltd (RIL), rating agency Moody’s said in its report on Monday.

“We expect further improvement in Ebitda (earnings before interest, taxation, depreciation and amortisation) levels over the next 12-18 months as the company gets full benefits of its investments in refining and petrochemical businesses …. However, the high cash outflow on capital spending will continue to constrain the company’s ratings for at least another 12-18 months,” the agency said in its report.

Commenting on the segment performance, Moody’s added “the refining margin for RIL will improve as the petcoke gasification becomes fully operational over the next few months”.

“The benchmark Singapore refining margin, however, will weaken because of increasing crude oil prices and constrain improvements in RIL’s refining margin,” it added.

RIL, in its investor meet, said it would cut its LNG consumption, which affects gross refining margins (GRM) in a higher pricing situation.

Although the reported capital spend for RIL declined 31 per cent in 2017-18, the creditors for capital spending remain high. This implies that the company will continue to have more cash outflow than its capital spending, Moody’s said.

The agency expects most of the capital spending to be on its digital services businesses.

“For the quarter, RIL reported an increase in the segment assets for its digital services of ~147.4 billion, a proxy for capital spending, as against its Ebitda of ~26.9 billion. We expect the digital services business to continue to generate negative free cash flows until at least fiscal 2019 as the company expands its network coverage and capacity further for its mobile business and also rolls outs its fiber to home and enterprise services business,” the report added.

In the last financial year, RIL improved its credit metrics while capital spending remained high. According to the Moody’s report, RIL’s debt increased to ~1.40 trillion as of March 31, 2018, against ~1.19 trillion a year ago.

However, the company’s credit metrics, as measured by net debt/Ebitda, declined to 1.9 in 2017-18 compared to 2.1 in 2016-17.

“The improvement in credit metrics is driven by higher earnings from its energy segment. Reliance’s Baa2 rating remains well positioned,” the report said.

Moody’s added a rating upgrade would require generating positive free cash flows consistently and other strong credit metrics.

Even as concerns on capital spending remain, others like Morgan Stanley expect capital expenditure intensity to reduce.

“This has been a key investor question, and we see some anecdotal evidence of capex intensity falling. RIL’s capex declined 33 per cent in FY18, and we expect a 40 per cent decline in FY19,” analysts with Morgan Stanley wrote in a research note.

RIL did not give any guidance on capital expenditure in the current financial year. However, the company said it would look at opportunities in the fibre-to-home segment.

In 2017, RIL, along with its partner BP, committed an investment of ~400 billion in the KG-D6 block.

In its analyst meet on Friday, RIL told analysts production in R-Series would commence by 2020 for 9-11 years, in the Satellite projects by 2021-22 for six-seven years, and in MJ-1 by 2021-22 for 9-11 years.

The terms of these projects, RIL told analysts, will be similar to the existing KGD6 ones.

The company is planning to open 1,890 outlets in twothree years, according to analyst reports. Some of these are to be looked at in partnership with BP and would be located on highways. The company has commissioned up to 1,313 auto fuel outlets up to March 2018.