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Announcement:

Moody's: Reliance's FY2012 results are lacking growth momentum

24 Apr 2012

Event risks remain as organic growth struggles

Singapore, April 24, 2012 -- Moody's notes that Reliance Industries Limited's ("RIL") full-year results for the fiscal year ended March 2012 came in slightly weaker than expected, but within the parameters of its Baa2 local currency issuer rating with a positive outlook.

Its foreign currency issuer and bond ratings outlook remain stable, in line with the country ceiling.

Benefitting from the rising selling prices, RIL's consolidated revenue grew 35% from the previous financial year to USD70.5 billion.

"The company's consolidated operating performance for FY2012 was steady compared to FY2011, despite a drag on the exploration and production (E&P) segment. However, its consolidated EBITDA margins declined to 11% from 15% in the previous year, due to lower contributions from the higher margin, E&P business, following the disposal of a 30% participating interest and lower production levels at the KG-D6 fields, and to a lesser extent, from narrowing margins in its petrochemical segment," says Philipp Lotter, Associate Managing Director at Moody's.

Export revenues surged by 41.8% to USD40.9 billion on the back of higher selling prices, which contributed 58% of the company's consolidated revenue, demonstrating the company's lower reliance on the domestic economy.

"The refining segment was the key earnings contributor. In FY2012, Reliance achieved gross refining margins (GRMs) of USD8.6/bbl, compared to USD8.4/bbl the year before. GRMs were negatively impacted in 2H FY2012 due to lower light-heavy differentials and higher LNG prices," says Lotter.

However, RIL maintained its GRM premium over the Singapore complex, and also maintained high utilization levels in FY2012, reporting its highest ever crude throughput at 67.6 million tons with an average utilization rate of 109%.

But a diminishing light-heavy differential will be a challenge in the future. The Light Heavy differential is expected to narrow with increased demand for heavier crudes, limiting the economic advantage of high-complexity refiners like RIL.

Thanks to the domestic demand, revenue from the company's petrochemical segment rose by 27.7%, with PX and PP as the largest contributor. EBIT dropped by around 5%, and the EBIT margin narrowed to 10.5% from 14% in the previous year, due to the margin contractions across the olefins and polyester chain businesses, with the exception of PVC, benzene and butadiene.

RIL's adjusted debt/EBITDA for FY2012 is estimated to be 2.3x on a consolidated basis, which is in line with its adjusted leverage for FY2010 and FY2011, and remains strong for its rating level.

"However, the company's event risk remains high, considering its substantial cash-on-hand of USD13.8 billion, low debt levels, and slow organic growth potential, which is further exacerbated by the government's recent rejection of its development plans for certain satellite fields that will be reassessed as part of an integrated development plan by year-end. This will delay their domestic E&P growth plans in the medium to long term" adds Lotter. While we expect such risk to have a modest impact on the company's financial health, further geographical diversification of its core operations without material deterioration of its financial profile would be positive to its credit profile.

In summary, RIL remains well positioned at its current rating, however it continues to face challenges which include: (1) resolving the reservoir complexities to attain normal production levels; (2) maintaining its refining competitiveness under the diminishing light-heavy differential; (3) coping with the margin cyclicality in the petrochemical industry; (4) increasing the income from its non-core business segments; (5) strategically managing its USD13.8 billion cash-on-hand.

RIL is a leading Indian energy company with significant refining and extensive petrochemical operations, as well as exploration and production business. The company operates one of the world's largest single-site refineries, the Jamnagar complex, with a refining capacity of 1.2 million bbl/day.

Vikas Halan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's: Reliance's FY2012 results are lacking growth momentum
No Related Data.
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