Reliance Jio faces competition, capex linked to customer base: Fitch
Fitch says robust operating cash flows from Reliance’s refining and petrochemical businesses will provide some cushion against any weak cash generation from telecom
New Delhi: Fitch Ratings on Thursday said Reliance Industries’ telecom arm Reliance Jio Infocomm 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 Rs1.6 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 Reliance 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.