Rating Rationale

Strengths
* Leadership in the petrochemicals industry in India
RIL is among the top global petrochemical manufacturers. It is the largest producer of Paraxylene, and the second largest for polyester fibre. Moreover, it is the fourth largest producer of Purified Terephthalic Acid (PTA) and the fifth largest for Polypropylene. In India, RIL accounts for nearly half of the total domestic cracker (ethylene) capacity, and has a production share of more than 50 percent in the polymers (PE, PP and PVC) market. Its strong market position helps it operate its petrochemical plants at full capacity and also benefits from its large scale.

RIL completed its large capital expenditure (capex) plan in this segment in 2019, which has increased its manufacturing capacity significantly, with volumes increasing from about 22 mn MT in fiscal 2015 to over 37 mn MT in fiscal 2019. RIL now operates the world's largest ethane transportation and cracker facility, which enables a sizeable import of the gas from North America. This provides RIL with flexibility to operate on either Ethane or Naphtha (produced by its own refinery) as feedstock for its petrochemical operations, based on the prevailing price dynamics. Moreover, it's 'Refinery Off-Gas cracker' (ROGC) project enables use of off gas, which is a by-product of its refinery.

RIL also benefits from its extended value chain ' from feedstock to advanced materials such as glass fibers, carbon fibres, composites and other materials, some of which are marketed under proprietary brands such as Recron, R Elan and RelWood.

These operating efficiencies have helped this segment's profitability remain resilient, with EBIT margins at 16-20% in fiscal 2020 YTD, despite the key product margins being at multi-year cyclical lows.

Weak demand owing to the Novel Coronavirus (Covid-19) outbreak may further impact product spreads, though the impact should be partly off-set by low input costs (Naphtha and ethane). Petrochemicals facilities continue to operate at a high utilization level.

* Strong competitiveness in the global oil refining business
RIL's competitive advantage in refining arises from its global-scale capacity as the largest single-site refinery in the world, broad product portfolio, and highly integrated operations. With a combined crude processing capacity of 1.24 million barrels per day (mbpd) and throughput of 68.3 MT in fiscal 2019, RIL is a significant player in the domestic oil refining market with a refining capacity share of about 27%. Both the company's refineries have consistently maintained high utilisation levels over the years. The Jamnagar site benefits from a superior Complexity Index (CI) of 21.1, which makes it among the most complex in the world, enabling RIL to process crudes of varying specific gravity and sulphur content.

High utilisation of the refineries helps maintain strong operating efficiency and healthy profitability. In addition, RIL's proximity to oil fields in West Asia (its facilities are located along India's western coast) gives it a logistical advantage, as it helps control transportation cost in procuring crude and exporting refined products.

Although gross refining margins (GRMs) have been subdued in the recent past in line with the industry, they have consistently been better than the benchmark Singapore margins. CRISIL believes RIL's strong competitive advantage has been enhanced by improved energy efficiency owing to the pet-coke gasification project, which was commissioned and stabilised production recently. Over the long term, RIL plans to transform its operations to produce about 70% petrochemicals and 30% jet-fuels, to hedge the risk of flagging demand for automotive fuels.

RIL's refinery is currently operating at full capacity, with a large part of its output being exported. Weak demand owing to the Covid-19 outbreak will likely impact GRMs, which should partly be offset by lower input prices ' particularly for poorer quality of crudes which RIL can process due to the high complexity of its refining operations.

* Strong market position in the retail segment
RRL is India's largest retailer by revenue and profitability. The company's strong market position is reflected in its leadership position across several formats and has been supported by consistent growth. The company has been expanding its presence across tier-2 and 3 cities, with its presence reaching around 6,900 cities/towns by December 31, 2019.

RRL reported strong year-on-year revenue growth of 33% in the first nine months of fiscal 2020 (including revenue for Jiophone sales and pre-paid recharges of Reliance Jio), driven by growth across all its consumption baskets: grocery, fashion, consumer electronics, connectivity, and petro retail. In this period, there has been a strong increase in revenue per store across formats, with the stores launched over the past few years gaining a foothold in their respective catchment areas. However, in the near term, sales in the fashion, consumer electronics, and petro-retail consumption baskets will be affected by the Covid-19 outbreak.

* Revenue market share leadership in telecom and continued strong traction in customer acquisition
With its aggressive customer acquisition strategy, RJIL has built a strong market position in a short time. With net addition of 90 million subscribers in the 12 months ended December 2019, RJIL has increased its subscriber base to 370 million, with a market share 32%, thus becoming the largest player by subscribers. In the mobile broadband space, it had a market share of 57.6% as on December 31, 2019. The company also achieved leadership in terms of telecom services revenue market share by the first quarter of fiscal 2020.

Over the medium term, given the management's focus, rapid customer acquisition will continue. Moreover, a healthy increase in monthly average revenue per user (ARPU) is expected in the fourth quarter of fiscal 2020 because of tariff increase in December 2019. RJIL's market position is supported by access to the telecom tower network of RJIPL (which has a superior backhaul with 70% fiberization of its towers) and by its digital ecosystem comprising various applications and digital content besides voice and data services.

* Exceptional financial flexibility
RIL's financial flexibility is demonstrated by its ability to raise resources by tapping the capital markets and through its large cash and liquid investments. The financial flexibility is also supported by unutilised bank lines. The company has a strong financial risk profile underpinned by stable, healthy profitability, and strong debt protection metrics.

Weaknesses
* Moderately high financial leverage
RIL's leverage is relatively high for its rating category, reflected in its Net Debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) of about 2.1 times expected for fiscal 2020. This is also reflected in its total outside liabilities to tangible net worth ratio, which is estimated at around 1.6 times as on March 31, 2020 - owing to high gross debt, payables and capital creditors.

Nevertheless, RIL recently completed its large capex in its oils-to-chemicals business and its digital business, with balance investment in tower/optical fibre networks expected to be incurred by RJIPL and JDFPL, respectively. Thus, capex should reduce significantly going ahead, while accrual will be enhanced by increasing profitability of the digital and retail businesses, boosting free cash flow. Consequently, leverage ratios are expected to improve sharply over the next two fiscals.

Moreover, the company plans to achieve a net cash position by March 31, 2021 which may be achieved with the divestment of 20% stake in its Oils-to-Chemicals business to Saudi Arabian Oil Company (Saudi Aramco) at a valuation expected at about USD 75 billion, and divestment of minority stake either in its digital or retail business segments.

* Exposure to regulatory risks in the telecom sector
Regulatory and policy changes have largely driven the risk characteristics of the Indian telecom industry. The sector is extremely dynamic structurally and technologically. Hence, thus the risks pertaining to continued regulatory intervention are likely to persist. CRISIL continues to monitor the regulatory developments in this field.