Rating Rationale

Strengths
* Strategic importance to RIL, and strong management and financial support from the parent
CRISIL believes that RJIL remains a strategically important investment for RIL, given the parent's substantial investments in RJIL, and focus on setting up a large digital services business. RIL's equity stake of 99.44 per cent, the active involvement of its management, and the shared identity of name 'Reliance' also support the rating. CRISIL, therefore, believes that RIL will continue to provide full operational, management, and strategic support to RJIL, including assistance in arranging funds for meeting its debt and interest servicing obligations, on a timely basis. Any change in RJIL's strategic importance to the parent or any decrease in RIL's ownership in RJIL to below majority will constitute a key rating sensitivity factor.

* Large liberalized spectrum holding
RJIL has a large liberalized spectrum holding of 1,108 megahertz (MHz). All of this spectrum can be used for rolling out any technology without any regulatory restriction. CRISIL believes that RJIL is uniquely placed with respect to offering LTE telecom services as it is the only player with pan-India liberalised spectrum across different spectrum bands (800 MHz, 1800 MHz and 2300 MHz), including sub-GHz LTE band, and license to offer new-age LTE services. The company has also deployed an extensive fibre network in the country. The company does not have any legacy networks and is likely to result into better operating efficiencies.

Weakness
* Regulatory risks in the telecom space
Regulatory and policy changes have played a central role in defining the risk characteristics of the Indian telecom industry. There has been significant improvement in the overall clarity of regulations over the past ten years, translating into an improved operating environment for the Indian telecom operators. The sector is extremely dynamic structurally and technologically; the need for, and risks pertaining to, continued regulatory intervention are therefore, likely to persist. CRISIL continues to monitor the regulatory developments in this field. In this context, CRISIL has taken note of the recent reduction in IUCs from earlier Re. 0.14/minute to Re. 0.06/minute from October 2017 onwards. Further, TRAI has proposed to scrap these charges from January 1, 2020 onwards.

* Exposure to revenue and profitability risks in a competitive industry
The Indian telecom space has well-entrenched players such as Bharti Airtel Ltd ('CRISIL AA+/Stable/CRISIL A1+'), and Vodafone India Ltd ('CRISIL AA/Watch Developing/CRISIL A1+'), from whom the company continues to face significant competitive pressures; these command a sizeable revenue share in the market and have been in operation for more than a decade.

However, notwithstanding these constraints, RJIL has reported healthy operating profitability in its first two quarters of operations. In Q3 FY18, RJIL reported net profit of Rs. 504 crore and EBITDA of Rs. 2628 crore on operating revenue of Rs. 6879 crore, with operating margins of 38.2% and ARPU of Rs. 154 (As against EBITDA of Rs. 1443 crore on operating revenue of Rs. 6147 crore in Q2'FY17). The company has acquired over 160 million subscribers by December 31, 2017, with healthy growth in customer base ' reflected in net addition of 21.5 million subscribers in Q3'FY18 and about 51.5 million in the first nine months of fiscal 2018.

RJIL has migrated from free to paid services by offering various plans focused on data consumption while voice calls are offered for free. In July 2017, Reliance announced its own brand feature-phone bundled with monthly plans for a refundable fee of Rs. 1500 per unit. This has given the company entry into India's large feature phone segment, and is expected to drive growth in customer base in the near to medium term. Nevertheless, the ARPUs from these customers will be lower vis-a-vis other subscribers of the company.

Despite the satisfactory acquisition of customers till now, RJIL's profitability going ahead depends on its ability to improve ARPUs, while also continuing growth in customer base.

Outlook: Stable (on NCDs with guarantee from RIL)
The outlook is based on the 'Stable' outlook on the rating of the guarantor, RIL.

Outlook: Stable (on other NCDs)
CRISIL believes that RJIL will remain strategically important to RIL, which will continue to provide strong management and financial support to the subsidiary.

Downside scenario
* Any change in CRISIL's outlook on RIL
* If RIL's ownership in RJIL falls below 51 per cent or if there is any change in the strategic importance of RJIL to RIL
* Weaker than expected operating profitability primarily on account of lower increase in ARPUs, over the medium term

About the Issuer
RJIL, a subsidiary of Reliance Industries Limited ("RIL"), has built an all-IP data network with latest 4G LTE technology, which supports voice over LTE. RIL holds 99.44% equity stake in RJIL. The network can be easily upgraded to support even more data, as technologies advance on to 5G, 6G and beyond. The company has created an eco-system comprising network, devices, applications and content to provide seamless services.

About the parent, RIL
RIL is one of India's largest private sector companies, with diverse interests, including petrochemicals, oil refining, and upstream oil and gas E&P. Oil refining is RIL's largest activity, accounting for around 64% of the revenue in fiscal 2017, followed by petrochemicals at around 23% (both before interparty transactions). In the recent past, RIL has diversified into newer businesses which includes organized retail and telecommunications.