Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Leadership and strong competitiveness in the O2C business in India

RIL has combined its refining and petrochemicals business into an integrated O2C segment. The company is amongst the top global petrochemical manufacturers. It is the leading producer of paraxylene, polyester fibre, purified terephthalic acid (PTA) and 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 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 amongst 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.

RIL's strong competitive advantage has been enhanced by improved energy efficiency contributed by its pet-coke gasification project set up. 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.

Strong market position in the retail segment

RRL continues to consolidate its position as India’s largest retailer by revenue, scale and profits. The company’s strong market position is reflected in its leadership position across several formats and has been supported by consistent revenue and profit growth. The company has been expanding its footprint by adding stores, expanding reach of its digital and new commerce platforms and enhancing product and service offerings. It is widely spread in tier-2 and tier-3 cities, with a network of 17,225 stores as on December 31, 2022.

RRL has successfully been able to ramp up JioMart, India’s largest hyperlocal platform operating across over 268 cities. Through its New Commerce initiative, RRL is linking producers with small merchants and consumers to create a win-win partnership model. The New Commerce merchant partner footprint has been expanded to more than 300 cities for grocery and 3,500+ cities for Fashion & Lifestyle, leveraging its investments in sourcing, product design and development, supply chain and technology.

Market share leadership in telecom and continued traction in customer acquisition

RJIL, subsidiary of JPL, has leadership position in terms of subscriber and revenue market share in the Indian telecom industry. As of December 2022, RJIL had wireless broadband customer market share of ~52% and overall wireless subscriber market share of ~37%. For quarter ended September 2022, RJIL had revenue market share of ~44% in terms of adjusted gross revenue.

RJIL purchased spectrum worth ~Rs 87,946 crores during the recently concluded spectrum auction. Post recent spectrum auction, RJIL’s total owned spectrum footprint has increased significantly to 26,768 MHz (uplink + downlink), which is the highest in India. Besides, the company also has access to an extensive network of telecom towers and optical fiber network in the country. This, along with the acquisition of spectrum in premium 700 MHz band in the recent auction would help the company to provide superior quality of services and enhanced coverage across circles, results in better operating efficiencies.

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. 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:

Exposure to regulatory and technological risks in the telecom sector

Regulatory and policy changes have played a central role in defining the risk characteristics of the Indian telecom sector, which is structurally dynamic. However, this has moderated with the structural reform measures announced by the Union Cabinet in last year.

The telecom industry also remains susceptible to technological changes. New technology in the telecom industry necessitates fresh investments or overhaul of existing networks. The advent of 4G, for instance, has seen operators investing substantially in upgrading infrastructure even before they had made significant gains on investments in 3G. Similarly, with the transition to 5G, players may again need to incur significant additional capex even after spending heavily for acquiring spectrum. Higher-than-expected investments having a bearing on financial risk profile will continue to be monitored.

High competitive intensity in the retail sector

RRL faces competition from other organized retailers, some of which have stores in catchment areas which overlap with its stores. Furthermore, with organized retail penetration in India being moderate at below 15%, players face intense competition from the unorganized segment, which operates in various addressable markets. However, India's unorganized retail sector is fragmented and plagued by operational inefficiencies. Reliance Retail's New Commerce initiative connects millions of small kirana stores and merchants across India with suppliers, manufacturers, and brands. It enables businesses to become more efficient and offer them a compelling value proposition to grow their businesses and earnings & thus benefit all players in the retail value chain.