Divestment will help to further RIL's ambitions within the retail segment without straining its balance sheet, Moody's said
Moody's Investors Service said on Monday that Reliance Industries Ltd's (RIL's) divestment of 1.75 per cent stake in its retail arm to private equity firm Silver Lake Partners for ₹7,500 crore is credit positive as it will enable the Indian conglomerate to continue pursuing other growth opportunities while maintaining zero net debt.
The deal is the company's first divestment within the retail segment, which is currently wholly-owned by RIL. With this deal, RIL has now established an enterprise value for its retail segment which sets the stage for further stake sales within the segment, said Moody's.
"The proposed divestment will help to further the company's ambitions within the retail segment without straining its balance sheet."
Although RIL's capital spending will drop compared with historical levels, the company will continue to incur large capital spending across all business segments for its next stage of growth.
"However, we expect the bulk of this growth to be financed by proceeds from asset sales, which will enable the company to continue with its strategy of maintaining zero net debt," said Moody's in its latest credit outlook.
With RIL's digital services business having achieved a critical mass and strong market position in India, Moody's said it will now focus on growing its retail segment.
The company is already the industry leader within the organised retail sector in India but the contribution from this segment to consolidated EBITDA remains low at around 10 per cent.
Further growth in the segment will augment RIL's overall earnings base and lead to improved earnings diversification. RIL's August 29 announcement of its acquisition of the consumer businesses of Future Group is a step toward growing its retail business and expanding its retail footprint, said Moody's.
"Including the current transaction and based on RIL's previous announcements, we expect the company to raise around 25 billion dollars from further stake sales across various business segments and balance proceeds from a rights issue offering in the next 12 to 18 months.
With zero net debt, all proceeds from future asset sales can be used for growth initiatives.
Notwithstanding the company's strategy of pursuing growth while maintaining financial discipline, a rating upgrade is unlikely unless the government (Baa3 negative) is upgraded to Baa2.
This is because the company's increased linkages with the domestic economy constrain its rating to no more than one notch above the Indian sovereign rating, said Moody's.