- Yield on RIL’s perpetual dollar notes hit all-time low Friday
- Completion of projects to boost operating performance: S&P
Bond investors are signaling billionaire Mukesh Ambani’s promises are bearing fruit.
As Reliance Industries Ltd. nears completion of its $41-billion spending spree on everything from new petrochemical projects to getting its fourth-generation wireless services running, optimism the investments will soon start contributing to revenue has driven the yield on its perpetual dollar bonds to a record low.
S&P Global Ratings says the capital expenditure by the operator of the world’s biggest refining complex will help reduce leverage and increase earnings over the next three years. It will also mitigate the threat to margins from 2016’s rebound in oil prices, that follows an extended period when refiners including Reliance benefited from declining Brent crude.
“Reliance is so diversified and so much money could be made in the downstream business, there is no real risk for us and that is why we are long the bond,” said Martin K Wilhelm, founder of money manager Ifk GmbH, which owns Reliance’s perpetual notes. “It’s a solid game and for the bond investor, there is no risk at all.”
The yield on the firm’s perpetual dollar bonds issued in 2013 has declined for three straight months, falling 48 basis points since end-February to 5.76 percent on Friday, according to data compiled by Bloomberg. It was little changed on Monday. That compares with 9.14 percent on similar-maturity debt of Philippines’ Petron Corp., the only other Asian refiner with perpetual notes. The yield on Reliance’s securities due in 2025 has fallen to 3.83 percent from as high as 4.55 percent in January.
Much of Reliance’s capital expenditure of $41 billion is for new projects. India’s second-largest company by market value had an investment of over 1.5 trillion rupees ($22.3 billion) in its telecom venture Reliance Jio Infocomm Ltd., Ambani said at the end of March. The unit is expected to start services this year.
Reliance Industries, which also operates stores that sell fruits and clothes, is investing to expand its petrochemicals capacity and reduce energy and feedstock costs to boost profitability. An e-mail sent to Reliance Industries’ spokesman Tushar Pania seeking comments didn’t get a response. Ambani is India’s richest person, with a net worth of $21 billion, according to the Bloomberg Billionaires Index.
“We will see further earnings/cash-flow growth in the near term as a result of new petrochemical projects commissioning and the telecom launch,” Raymond Chia, the Singapore-based head of credit research at Schroder Investment Management Ltd., and his team, wrote in an e-mail. “Reliance is just exiting a capex cycle, while broadly protecting its balance sheet and rating. Although refining margins are likely to come down, they will still be fairly robust.”
Equity investors don’t seem to share quite the same enthusiasm, with Reliance shares falling to a three-month low in May. They have dropped 3.5 percent this year, compared with a 1 percent advance in the benchmark S&P BSE Sensex.
Bond risk for Reliance is falling. Contracts protecting the firm’s debt against non-payment have dropped 17 basis points since reaching 221 on May 19, the highest level since 2014, according to data provider CMA. The firm is also said to be seeking an end to a dispute with the Indian government over an offshore natural gas block, which will allow Reliance and its partners to take advantage of new pricing policies.
Net income climbed 17 percent from a year earlier to 73.2 billion rupees in the quarter ended March, the highest in more than eight years. Group profit rose 16 percent to 73.98 billion rupees in the period. Its refining margin -- the earnings from turning crude oil into fuels -- was $10.8 a barrel, compared with $10.1 a year earlier and $11.5 in the three months ended December.
“We expect improvement in Reliance Industries’ operating performance over the next three years from the commissioning of large refinery and petrochemical projects, as well as the rollout of telecom operations,” Mehul Sukkawala, a Singapore-based analyst at S&P Global, wrote in a May 31 report. The company’s “competitive position” should “further strengthen following the completion of the investment projects.”