Reliance Jio faces competition, capex linked to customer base: Fitch

Fitch Ratings today said Reliance Industries' arm Jio faces stiff competition from financially strong incumbent telecom players like Airtel and future capex will depend on growth of its customer base.

Fitch re-affirmed 'BBB-minus' rating on RIL with stable outlook on strength of its robust refinery and petrochemical business and expects benefits from its investments in the core business to start accruing from 2017-18.

With almost Rs 1.6 lakh crore already invested in the telecom venture, future capex "will depend on the growth of its customer base", it said.

"The robust operating cash flows from its refining and petrochemical businesses and relaxed investment requirements in these businesses will provide some cushion against any weak cash generation from the telecom operations for some time," Fitch said.

The rating agency, however, expected RIL to be able to take advantage of the strong growth potential in the Indian telecom market as it has invested significantly in infrastructure that would cover 90% of the population by 2017-18 end.

"Jio will face intense competition from the financially strong incumbent Indian telecom players, but we believe falling data tariffs will support significant expansion of overall data consumption in India over the medium term," it said, adding that the robust infrastructure along with its affordable 4G data offerings will support Jio's growth.

Fitch said it expects "Jio's wide range of offerings, including media and entertainment content, to help in subscriber additions and data consumption, which will drive cash generation".

It is of the view that future capex relating to Jio will depend on the growth of its customer base.

Jio is expected to break even on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis in 2018, supported by affordable 4G data offerings and robust infrastructure.

RIL also continues to face challenges in its upstream oil and gas operations with declining production and weak prices.

"We expect RIL's upstream operations to remain weak over the short term because of weak oil and gas prices, and geological challenges in its domestic fields," it said.

The company's ongoing investments will drive up RIL's debt levels in the current fiscal.

"However, Fitch expects its financial profile to improve from 2017-18 onwards with higher cash generation from its refining and petrochemical operations," the statement said.

Expecting financial leverage to improve by 2018-19, Fitch said this provides some rating headroom under its unconstrained-'BBB' credit profile during its ongoing heavy investment in the telecom operation.

RIL's ratings are supported by its strong business profile - a large-scale refinery with capacity of around 1.24 million barrels per day - and robust asset quality, which enables it to consistently deliver gross refining margins (GRM) above regional benchmarks, it added. 

"The company also has a strong market position in petrochemicals. Large investments nearing completion will further enhance the company's competitiveness in these areas," Fitch said.

It said RIL's refining and petrochemical operations are supported by their large scale, asset quality and the company's leading position in the two segments.

RIL's highly-complex refineries in Jamnagar in Gujarat and its flexibility to optimise both crude diet and product slate enable it to consistently outperform regional refining benchmarks.

During the six months to September 30, RIL earned $10.8 on turning every barrel of crude oil into fuel compared with $10.5 per barrel gross refining margin in the same period a year ago.

"We expect GRM to narrow in the near term in line with the industry trends; although the commissioning of a gasification unit in FY17 should result in a sustained increase in RIL's GRMs by around $1.5-2.5 per barrel," it said.

Also, RIL plans to complete the capex in the refining and petrochemical business by H1 of 2017-18, with the majority being completed during 2016-17.

"Fitch expects the benefits from its investments in the refinery and petrochemical operations to start accruing from 2017-18 and support improvement in its profitability and operational cash flows.

"The expanded paraxylene capacity, along with refinery off-gas cracker and ethane sourcing, will help improve RIL's downstream integration and strengthen its competitive position in the petrochemical business," the statement said.

It also expected lower overall capex after 2017-18 although the company may continue to invest in its telecom business.