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Something is changing in the way markets view RIL…

Companies and Sectors | Published on Feb 22nd 2017 | Comment(s) 0
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Ok, here is a small quiz! When was the last time that the stock of Reliance Industries was up by over 11% in a single day? In case you are not aware, the last time the stock saw such a sharp move was in May 2009, a day after the ruling Congress coalition was voted to power with a near majority. The very fact that this is happening after 8 full years, signals that it is a special event and needs to be looked into in much greater detail. While the Reliance Jio growth story narrated by Mukesh Ambani at a press conference on Feb 21st is definitely one trigger, there is obviously more to it…

 

Reliance Jio has surely taken the telecom market by storm…

 

It is not surprising that each time Reliance Jio hosts a press conference, the price of other telecom stocks start moving down. The reason is that Jio has managed to disrupt the telecom industry like never before. Free voice calls and extremely competitive data prices has taken the battle right into the opponent’s camp. Consider some of the statistics! In less than 6 months since its launch, Reliance Jio has already crossed the 100 million subscribers mark. In fact, since the day of its launch, Reliance Jio has been adding an average of 7 new customers per second, a feat that is unparalleled in the Indian telecom industry. In fact, this rate of customer accretion is even faster than the pace achieved by Facebook and WhatsApp at their peak. The big tipping point for Reliance Jio could occur when the Jio network manages to cover 99% of India’s population by the end of 2017.

 

It is not just pricing, but the data market could actually explode…

 

What shareholders are beginning to appreciate is that notwithstanding the low prices, there is a methodical move towards ROI. In fact, data was the one area where large scale cost reduction was possible. A small to medium-sized data user who approaches Vodafone or Airtel for a 2GB data top-up ends up paying around Rs.400. That is roughly $3/GB. This may be comparable to many developed countries, but in a country like India with a per capita GDP of $1700/-, this is a recipe for putting an upper limit to the data market. So what happens when Reliance Jio data services go priced? A 30GB package is likely to be priced at around Rs.303, which makes it nearly Rs.10/GB. At $0.15/GB, the Jio offer promises to actually expand the Indian data market exponentially. For the existing telecom companies, it will be a Catch-22 situation on data pricing.

 

Yes, Reliance Jio is moving towards break even and it is an ARPU game…

 

According to early estimates by brokers, Reliance Jio is likely to break even by mid-2018 on an EBITDA basis. That would still be a phenomenal achievement. A lot will depend on how Jio sustains growth after the free offer is withdrawn. Remember, RIL has promised to offer free voice calls for life. That means, it will have to only rely on data for all its revenues and also covering the cost of providing voice services. On the data front, Airtel has an ARPU of less than Rs.190 while Vodafone’s data ARPU is less than Rs.160. That is still lower than the Rs.303 ARPU that Reliance Jio is targeting. Of course Jio will not earn from voice calls and that could mean the following outcomes: 1. Vodafone, Idea and Airtel will be forced to drop their voice charges drastically to stem the migration to Jio under the MNP which is permitted now, or 2. In the explosive growth in the data segment, Reliance Jio may emerge as the biggest beneficiary of the “Winner takes it all” syndrome. Either ways, shareholders of Reliance have reasons to rejoice.

 

Tremendous traction in the core RIL business…

 

RIL has already invested close to $25 billion into Reliance Jio and that has only been possible because of a very robust cash flow generated by the core RIL. For starters, RIL has been consistently beating analyst estimates on earnings and revenues for the last 7-8 quarters. RIL’s standalone EBITDA margins at 15.2% remains among the best in its sector. But the biggest advantage for RIL is in its gross refining margins (GRMs). As of the December quarter, RIL had a GRM of $10.8/barrel. This compares very favourably with the Singapore benchmark for Asian refiners which stand at just $6.7/barrel. In fact, RIL has consistently maintained its 3-4 dollars gap over the Singapore benchmark, due to its economies of scale and vertically integrated hydrocarbons model. The petchem margins of RIL in the range of 14-15%, is again among the best in the industry. It is this superior performance that has helped RIL fund its Jio venture that is now getting reflected in the price.

 

So, what has driven the 11% returns in the RIL stock in a single day on 22nd February? Actually, it has been a mix of 4 factors…

 

  • The Jio business has shown unparalleled growth in any customer facing industry and that is likely to translate into big dividends on the data business for Reliance Jio.

 

  • The uncertainty over Jio’s breakeven has been largely addressed with greater clarity emerging that the company will be breaking even by 2018 on the EBITDA front.

 

  • The core business of RIL consisting of refining and petchem has been outperforming analyst expectations for over 7 quarters and that is getting factored in

 

  • Better customer visibility due to telecom will position RIL more as a consumer facing company. Hence it will move out of the commodity discount valuation towards more of a cross-customer premium.




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