Reliance Industries Limited (RIL)’s profits will soar up according to Finch Ratings that came up on Tuesday. The increase of profitability in 2014-15 year would help RIL to invest more in raising production.
At present, KG-D6 oil fields located in Bay of Bengal contribute about 40 percent of the energy giant’s revenue from oil and gas exploration and production business in 2012-13. This report was in affirmation with RIL’s Long Term Foreign Currency Issuer Default Rating at ‘BBB-‘ and LT Local Currency IDR at ‘BBB’. Currently the natural gas is priced at $4.2 per million British Thermal Unit (Btu) that might be increased to $8-8.5 per Btu. “This re-pricing has met resistance from the user industries largely power and fertilizer as well as from the finance ministry. If upwardly revised, RIL’s E&P revenues and profitability are expected to be significantly higher from FY15, when the price revision is due,” said the official statement. However, higher investment for more production growth will be required from RIL and its European partner BP.
Currently, Mukesh Ambani owned RIL has good and quick access to banks and capital markets in both national and international markets. The company also has comfortable liquidity with high cash balance available. This upgrade in the ratings of RIL, particularly the local currency IDR of ‘BBB’/Positive , which is not constrained by the country ceiling of India’s ‘BBB’-sovereign rating , will also stimulate meaningful improvement in its domestic upstream operations result.
Recently, RIL has started further expansion of the production of oil and natural gas. These new discoveries and potential gas price hike will gather higher investment rates and production over time will prove beneficial for the company’s profile.
Furthermore Fitch stated in its report that it will consider an up gradation in the profile of the company after observing its developments for the 12-18 months of span. It will also focus on RIL’s plans to expand its production and strategies to optimize use of its reserves. It may also revise the Positive Outlook on its LC IDR to Stable if the company does not demonstrate strong development of materially improving its upstream profile in the upcoming year. It will also take into account any large debt funded investment that will lead to its leverage being sustained over 1.5 times.
If India’s Country Ceiling falls from the current state of ‘BBB’-level, the company’s foreign currency IDR will be affected adversely.