Ratings Watch

Excerpts of the credit rating actions of companies over the last couple of months

S&P upholds Reliance Industries' credit rating

Standard & Poor's Ratings Services in a release made last week has said that its long-term corporate credit rating on Reliance Industries Ltd. (RIL; BBB/Positive/--) was unaffected by the company's plan to buy back equity shares. “A 25 per cent drop in RIL's EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortisation) in the quarter ended December 31, 2011, compared with the previous quarter will also not affect the rating, in our view.”

The rating agency believed that “RIL's liquidity will remain strong despite the buyback, considering the company's significant cash and cash equivalent of Rs 745 billion as of Dec 31, 2011. The buyback plan could result in a maximum cash outflow of Rs 104 billion.” The report cited that the rating on RIL had already factored in a likely volatility in operating performance due to the cyclical nature of the refining and petrochemical sectors and the challenges at the company's KG D6 block, where gas production is declining.

“We believe RIL's financial performance will remain strong in the next 12 months, with the ratio of adjusted debt to EBITDA at less than 1.5x. We adjust the ratio for cash and cash equivalent excluding Rs 75 billion, which we assume the company needs for its operations. In our view, RIL's business strategy, particularly the use of its significant cash balances, would be a key determinant of any future rating action on the company.”

Instruments with ‘S&P BBB+' rating (for long-term instruments) are considered to “have adequate capacity to meet financial commitments, but are more subject to adverse economic conditions.”

ICRA downgrades Dwarikesh Sugar Industries

ICRA has downgraded the long-term rating from BBB to BB+ assigned to the Rs 573.34 crore fund based limits and long-term loans of Dwarikesh Sugar Industries.

It has changed the outlook for the company's long-term rating from ‘stable' to ‘negative'. “The revision of ratings takes into account the deterioration in the outlook for UP-based sugar mills, including Dwarikesh Sugar Industries following a significant hike in cane prices announced for the sugar year (SY) 2011-12 by government of Uttar Pradesh coupled with expectations of supply side pressures on sugar prices.” While ICRA has taken note of “some improvement in price realisation in Q1 SY 2011-12”, it expects that it is “unlikely to be sustained given the scenario of falling international prices, expectations of domestic oversupply and uncertainty on exports beyond the 1 million MT, which has already been announced by the GoI”.

“The company's ratings are also constrained by the sharp deterioration in its financial profile as reflected in losses incurred in SY 2011, which has in turn resulted in depletion in its net worth and a high gearing of ˜4.0 times as on September 30, 2011”.

Further, ICRA “expects its debt repayments falling due in SY2012 and SY2013 to be significant in relation to expected accruals, thus keeping its debt coverage indicators and liquidity under pressure in the medium term”. The rating also reflects the risks arising out of the inherent cyclicality in the sugar business, agro-climactic factors and government policies governing cane pricing, sugar release mechanism and pricing of by-products, said ICRA in its report.

“Nevertheless, the ratings continue to derive some comfort from the company's long track record in the sugar business, satisfactory operational performance and forward integration into cogeneration and distillery businesses, which will continue to provide alternate revenue streams and some cushion against cyclicality in the sugar business.”

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