| Reliance Industries Limited | ||||||||||||||||||||
| Ratings reaffirmed at 'CRISIL AAA / Stable / CRISIL A1+ ' | ||||||||||||||||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the existing debt instruments and bank facilities of Reliance Industries Limited (RIL).
RIL is in the process of transferring its oil to chemical (O2C) business to its wholly-owned subsidiary, Reliance O2C Ltd (O2C), through a scheme of arrangement to be approved by the National Company Law Tribunal (NCLT). On February 3, 2021, the necessary filings were made before the NCLT Mumbai and NCLT Ahmedabad benches for approval. Once all approvals are received, the O2C undertaking shall be transferred from RIL to O2C with effect from the appointed date (January 1, 2021).
Other verticals namely upstream oil & gas, textiles business, financial services, central treasury function and international trading division would remain within the books of RIL standalone entity. In addition to the above business segments, the standalone entity will be the ultimate holding company for its three key business verticals (O2C, Retail and Digital) through investments in subsidiaries (Reliance O2C Ltd, Jio Platforms Ltd and Reliance Retail Ventures Ltd).
The consideration for O2C assets would be funded by an interest bearing loan of Rs 1.8 trillion from RIL to O2C, on which O2C will pay a floating rate interest linked to 1-year SBI MCLR rate. The management control of O2C will also remain with RIL. As such, the proposed reorganisation would enable focused pursuit of opportunities across O2C value chain and would also facilitate on-boarding of potential strategic partner(s)/ investors in the O2C business.
Thus, CRISIL Ratings believes that the reorganisation will not impact the group’s credit profile as the consolidated business and financial profiles will remain largely unaffected.
Further, RIL’s operating performance remained healthy for the nine months ended December 2020, despite the impact of the pandemic on O2C and retail businesses, aided by strong profitability in digital services business. The consolidated earnings before interest, tax, depreciation, and amortisation (EBITDA) stood at Rs 57,386 crore for the nine months ended December 2021 as compared to Rs 66,975 crore in the corresponding period of the previous fiscal.
In the third quarter of fiscal 2021, the demand for oil improved by one and a half million barrels per day sequentially. Prices have also strengthened. The demand for polymer as well as polyester is recovering gradually. Oil demand has reached over 99% of the pre-covid levels in products such as gasoline. Thus, O2C business is seeing a very strong sustained recovery in demand for all the products. However, the gross refining margins (GRMs) remain subdued.
Further, about 96% of the Reliance retail stores became operational by the end of Q3FY21 (Q2: 85%), of which 52% fully operational (Q2: 43%) and reached overall footfall at 75% of the pre-covid levels. Despite operational challenges, EBITDA remained healthy because of near doubling of Fashion & Lifestyle profit, benefit of cost management initiatives and boost from higher investment income. Reliance Digital Services also posted strong growth in EBITDA during the quarter ended December 31, 2020, led by high gross subscriber addition and improvement in blended average revenue per user (ARPU) to Rs 151 (up 17.9% on-year) resulting from continued increase in customer engagement. The ratings continue to reflect RIL's leadership and strong competitiveness in the O2C business, leadership position attained by RJIL in the telecommunications (telecom) industry and by Reliance Retail Ltd (RRL; 'CRISIL AAA/Stable/CRISIL A1+') in the retail industry, along with its exceptional financial flexibility. These strengths are partially offset by RIL's leverage, though net leverage has reduced significantly with the recent equity raising in the digital and retail businesses. |
Analytical Approach CRISIL Ratings has considered a consolidated approach and has combined the business and financial risk profiles of RIL and its subsidiaries, as these entities are part of core operations of RIL.
CRISIL Ratings has also fully consolidated group companies that are strategically important to RIL, and have significant operational linkages with it. These companies are part of the Reliance Industries Holding Pvt Ltd group, viz. Jamnagar Utilities and Power Pvt Ltd (JUPPL; formerly, Reliance Utilities & Power Pvt Ltd; 'CRISIL AAA/CCR AAA/Stable/CRISIL A1+'), Sikka Ports & Terminals Ltd (SPTL; formerly, Reliance Ports and Terminals Ltd; 'CRISIL AAA/Stable/CRISIL A1+'), and East West Pipeline Ltd (EWPL; formerly, Reliance Gas Transportation Infrastructure Ltd). CRISIL Ratings considers these entities as strategic given their strong integration with RIL's oils-to-chemicals operations.
RIL has transferred the fibre and tower assets of RJIL, along with a portion of liabilities, into two special purpose vehicles (SPVs): Jio Digital Fibre Pvt Ltd (JDFPL; 'CRISIL AAA/Stable/CRISIL A1+') and Summit Digitel Infrastructure Pvt Ltd (SDIPL; 'CRISIL AAA/Stable') that are held by separate trusts. While the SPVs operate independently, RJIL has entered into off-take arrangements given the criticality of these assets for its operations. CRISIL Ratings has capitalised the present value of a part of payments as per long-term tower contracts with SDIPL, as per the applicable accounting standards. CRISIL Ratings has followed a similar approach for contractual payments made to Pipeline Infrastructure Pvt Ltd ('CRISIL AAA/Stable').
Pass-through certificates (PTCs) issued by First Business Receivables Trust ('CRISIL AAA(SO)/Stable'), under a securitisation transaction originated by RIL, have been added to debt. Similarly, PTCs issued by various trusts, originated by RRL, for taking JioPhones on lease for 3 years, have been added to debt.
Deferred payment liabilities of RJIL towards the Department of Telecommunication (DoT) for acquisition of spectrum stood at Rs 18,839 crore as on March 31, 2020. These too have been considered as debt.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
RIL has combined its refining and petrochemicals businesses into an integrated O2C segment, which is being transferred to a wholly owned subsidiary. This would allow RIL to pursue further opportunities for growth along with the possibility of strategic partnerships.
RIL is among the top global petrochemical manufacturers. It is the largest producer of paraxylene, and the second largest of polyester fibre. Moreover, it is the fourth largest producer of purified terephthalic acid (PTA) and the fifth largest of polypropylene. In India, RIL accounts for nearly half of the total domestic cracker (ethylene) capacity, and has a production share of more than 50% 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 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, its Refinery Off-Gas cracker (ROGC) project enables the use of off-gas, which is a by-product of its refinery.
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 crude refining capacity of 1.4 million barrels per day (mbpd), RIL is a significant player in the domestic oil refining market with a refining capacity share of about 27%. Both refineries of the company 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 GRMs have been subdued in the recent past in-line with the industry, they have consistently been better than the benchmark Singapore margins. RIL's strong competitive advantage has been enhanced by improved energy efficiency owing to the pet-coke gasification project, which was commissioned and production at the site was stabilised recently. . In the long term, RIL plans to maximize downstream and reduce transportation fuels foot print in a phased manner, to hedge the risk of flagging demand for automotive fuels.
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, resulting in more than 12,000 stores as on December 31, 2020.
RRL reported strong year-on-year revenue growth of 25% in 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.
Even amidst the pandemic, Reliance retail stores continued to operate under restrictions, though improving on quarter, with over 96% of stores being operational by December 2020, 52% of which was fully operational and balance continuing to operate under restrictions. Despite this, reported EBITDA remained healthy at Rs 6,219 crore in the nine months ended December 31, 2020 as compared to Rs 7,126 crore in the corresponding period of the previous fiscal. This is led by the near doubling of fashion and lifestyle, cost management initiatives and a boost from higher investment income.
With its aggressive customer acquisition strategy, RJIL has built a strong market position in a short time. With net addition of 50 million subscribers in the 12 months ended December 2020, RJIL has increased its subscriber base to 410.8 million. It has become the largest player by subscribers with an overall market share of ~35% as on December 31, 2020. The company also achieved leadership in terms of telecom services revenue by the first half of fiscal 2021.
Over the medium term, given the management's focus and customer acquisition, increase in monthly ARPU is expected to continue. RJIL's market position is supported by access to the telecom tower network of SDIPL (which has a superior backhaul with 70% fiberisation of its towers) and by its digital ecosystem comprising various applications and digital content besides voice and data services.
The increasing proportion of higher growth consumer-oriented businesses of retail and digital services have helped diversify RIL away from its traditional refining and petrochemical businesses (or O2C business).
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. 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:
RIL's leverage was relatively high for its rating category, reflected in its net debt to EBITDA at 2.2 times for fiscal 2020. This is also reflected in the total outside liabilities to tangible networth ratio, which was at 1.8 times as on March 31, 2020, owing to high gross debt, payables, and capital creditors. However, RIL has recently completed its large capex in its O2C and digital businesses, with balance investment in tower/optical fibre networks expected to be incurred by SDIPL and JDFPL, respectively, which would in turn improve the financial risk profile.
Besides, with the recent initiatives undertaken by the company, including the rights issues and divestment of minority stake in retail and digital businesses, RIL is able to achieve a net cash position (including the pending rights issue commitment). Capex, though expected to remain moderate, could increase if higher investments are made for purchase of spectrum during auction to be held in March 2021 and would continue to be monitored.
Regulatory and policy changes have largely driven the risk characteristics of the Indian telecom industry. The sector is extremely dynamic structurally and technologically. Hence, the risks pertaining to continued regulatory intervention are likely to persist. Regulatory developments in this field will continue to be monitored. |
Liquidity: Superior Liquidity should remain robust owing to the exceptional financial flexibility, given the company’s resource-raising ability from capital markets, and sizeable cash and liquid investments (Rs 220,524 crore as on December 31, 2020) at a consolidated level. Moreover, financial flexibility remains supported by sizable bank lines, which usually remain unutilised to the extent of 30-50%. Capex, though expected to remain moderate, could increase if higher investments are made for purchase of spectrum during auction to be held in March 2021. However, sufficient cash accrual, and cash & cash equivalents should be adequate to meet maturing debt as well a portion of the capex requirement. |
Outlook: Stable CRISIL Ratings believes RIL's credit risk profile will continue to be supported by the highly integrated operations in the core business of O2C, healthy profitability in its digital and retail businesses, and exceptional liquidity. |
Rating Sensitivity factors Downward factors
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About the Company RIL is one of India's largest private sector companies, with diverse interests, including petrochemicals, oil refining, and upstream oil and gas exploration and production. RIL has strong competitiveness in the global oil refining and petrochemicals business, arising from its integrated business model with superior Complexity Index of 21.1 for its Jamnagar site, which makes it among the most complex sites in the world. Moreover, it is among the top 10 global petrochemical manufacturers and the leading player in India. In the recent past, consumer facing businesses including retail and digital services have become RIL's principal growth drivers. RRL is India's largest retail entity by revenue, while RJIL is India's largest telecom service provider by market share. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
% Yet to be assigned **Fully interchangeable between bank guarantee, letter of credit, export packing credit, and post-shipment credit |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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