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Since 1st March, 1999
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Moody’s raps overweight Reliance

Mumbai, Jan. 14: Moody’s Investor Service has revised from stable to negative its rating outlook on Reliance Industries, striking a jarring note a day before the group’s IndiaMobile phone service roars off the block.

While reaffirming the Ba2 rating on its senior unsecured debt securities, the agency said: “This action reflects concerns over the recent aggressive internal and external expansion by the group and the growing financial risks associated with this rapid expansion.”

Reliance shrugged off the rap, citing a Standard & Poor’s (S&P) decision to affirm its BB foreign currency rating. “Last week, S&P, a leading international rating agency, re-affirmed Reliance’s credit rating at BB, the same level as India’s rating. It has also made it clear that our own rating is constrained by the sovereign ceiling,” a Reliance spokesperson told reporters here today.

However, what was left unsaid was that S&P raised concerns about the strengths of India’s largest private sector company. Much of the pitfalls were perceived in the uncertain returns and greater risks in diversified areas like telecom, oil exploration and marketing compared with Reliance’s petrochemical and oil-refining business.

Rivals reacted in measured tones, saying it is for those involved as partners in the Ambanis’ ambitious ventures to weigh the pros and cons of the rating change.

The Tatas, rapidly expanding their telecom operations across the country, were unperturbed. “It is difficult to say how much impact such a rating will have on the overall plan of a company. It will all depend on the lenders and investors who will have to make the final decision,” Tata Industries managing director K. A. Chaukar said. “It is a question of risk and benefits that is perceived by the lenders and investors in evaluating the business proposition of a company,” he added.

According to Moody’s, the company has been expanding outside its well-protected, strong-margin petrochemicals business even after acquiring a significant equity stake in IPCL, the country’s second-largest petro-chemicals firm, for a little over $ 500 million.

The expansion includes the merger of Reliance Petroleum and the launch of its new low-cost telecom service that aims to knit most cities and villages in the near future.

The group has also announced plans to build a nation-wide petrol retailing network (of at least 1,500 stations), wants to raise stake in BSES, its power generation and transmission company, and struck gold with a gas discovery on the south-western coast, Moody’s said.

“Moody’s believes that this rapid expansion into more competitive markets will lead to weaker profitability and thinner operating margins (especially in refining and telecom). This will be accompanied by a significant rise in investment levels,” it added.

“This is a normal practice whenever a company enters a new area of operations, there would be implied risks and these have to be taken into account,” a telecom and infotech consultant in International Financial Corporation said.

Mahesh Uppal, a senior telecom analyst, said: “What telecom companies are doing is bound to impact ratings. Their operations are driven by regulation and today there is uncertainty. So, it is not surprising that the rating has been affected by the environment.”

Moody’s said it was ‘unclear’ how much of the financing for these investments will show on Reliance’s balance-sheets (the telecommunication companies — Reliance Infocomm and Reliance Telecom are only treated as non-consolidated associate investments). Other things that beg answers are whether the slew of new projects will be debt-financed, via Reliance Industries’ associate companies, and just how much money will come from strategic or financial partners.

“The Ba2 ratings we have assigned reflect Reliance’s entrenched domestic positions in petrochemicals, including a big market shares, world-class production facilities with high economies of scale, strong margin performance and good cash-flow generation in petrochemicals and derivatives, even during periods of cyclical weakness,” the agency release said.

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