(MENAFN- Gulf Times) Bond risk for billionaire Mukesh Ambani's Reliance Industries is falling for the first time in four quarters as it gets ready to start a fourth-generation mobile phone network and to make more synthetic materials.
Contracts that protect debt in India's second-biggest company by value against non-payment have fallen 22 basis points from an eight-month high of 206 on August 25, according to data provider CMA. That compares with a 14 basis point drop in credit-default swaps on State Bank of
India, considered a proxy for the sovereign.
Fitch Ratings sees earnings getting a boost almost from day one from Reliance's expansion in polymers used for textiles and packaging and predicts it will be among the top five players in offering 4G services. Profit in the April-June quarter was the highest in 7 1/2 years as lower oil costs increased earnings from the world's biggest oil refinery complex.
"Profitability will improve with the commissioning of some of petrochemical units in 2015," said Tahera Kachwalla, Singapore-based analyst at the rating company.
"RIL has invested heavily in its telecom division, and we expect it to be among the top five players in the business in India." Reliance is investing $17bn to boost its petrochemicals capacity and build facilities to import ethane from the US, securing low-cost feedstock for polymer resins such as those used to make clothing and containers. The firm in July said it has spent more than 70% of the planned expenditure for the project that will get fully commissioned in two years.
It's spending another Rs700bn ($10.6bn) through its unit Reliance Jio Infocomm that is slated to start commercial operations around December with speeds faster than most existing Indian connections. The Reliance group had cash and equivalents of about Rs633bn at the end of June and total debt of Rs1.61tn, data compiled by Bloomberg show. Tushar Pania, a spokesman for Mumbai-based Reliance, didn't respond to an e-mail seeking comment.
Investor appetite for Reliance's bonds seems to be picking up. The yield on its dollar notes maturing in 2025, which are rated BBB+ by Standard & Poor's, has fallen 24 basis points this quarter to 4.22%. That on the securities due in 2045 has declined 13 basis points to 5.49%. In comparison, the average yield on dollar debt issued by Indian companies has climbed 13 basis points to 4.75%, JPMorgan Chase & Co indexes show.
"The company has huge cash reserves and their bonds are trading quite strongly," said Sudip Shah, London-based chief executive officer of Orbit Investment Securities Services.
His clients hold Reliance Industries' bonds.
Being among a handful of refiners globally with the ability to process low-grade crude into high-value products and switch between fuels depending on market prices, Reliance is gaining from crude's 51% slump in the past year. Prospects for the company, which produces gas from a field off India's east coast, also improved with the Indian government's decision last year to free diesel prices of state control and raise tariffs on natural gas.
Reliance's standalone net income increased to Rs63.2bn in the three months ended June from Rs56.5bn a year earlier. That beat the Rs62.5bn median estimate of analysts in a Bloomberg survey.
"The refining business has shown very good performance, especially in the first-half of 2015," said Kachwalla of Fitch.
"The deregulation of diesel has provided a level playing field for private oil refiners such as Reliance to retail petroleum products, which will enable them to increase profitability." Reliance will start its petcoke gasification project in phases beginning with the March quarter. That will help save $2bn, Ambani told shareholders in June. A new unit that will produce paraxylene, used in making polyester fiber and plastic beverage bottles, will also get started around the same time, according to a presentation on the company's website.
The diversification doesn't end there for Ambani, who is India's richest person and ranks 37th worldwide with a net worth of $19.2bn, according to the Bloomberg Billionaires Index.
Reliance Industries was among 11 companies that won the Reserve Bank of India's "in-principle" approval last month to set up payments banks as Asia's third-largest economy seeks to increase citizens' access to financial products.
Established by Mukesh's father Dhirubhai Ambani in the 1960s, the group has disrupted nearly every market it's set foot in, starting from polyester. The 4G rollout will mark the billionaire's return to the sector after he crashed prices selling bundled handsets and services for less than $8 back in 2003.
"The outlook for Reliance among international investors is positive given the way oil prices have come off," said Raj Kothari, a bond trader at Sun Global Investments in London.
"The quarterly results helped boost that positive sentiment further and we believe 4G is going to be a very important growth driver for the company."
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