Reliance Jio a surprise, Edelweiss rates Reliance Industries stock as Buy

RJIO debuted with EBIT breakeven, with healthy ARPU of Rs 156 and 139 million subscribers. RJIO’s operating cost surprised positively with unit network cost 49% lower than Idea’s in Q1FY18.

Written by Edelweiss

October 23, 2017 04:56 IST

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While core showing was mixed, commissioning of mega projects will bolster earnings; FY19e EPS up 20% owing to Jio prospects.

Reliance Industries’ (RIL) Q2FY18 surprised positively yet again, spurred by Reliance Jio’s (RJIO) robust debut. RJIO’s strong operating competitiveness and healthy consumer traction further enhances our conviction on RIL. Core performance was mixed: (i) GRM disappointed amidst adverse movement in crude spreads; and (ii) petchem maintained strong momentum driven by healthy polyester & PVC spreads and benefits from downstream core projects. We believe commissioning of grandiose $20 bn core projects is likely to bolster RIL’s earnings, boost RoE and turn-around free cash flow (FCF). Maintain Buy with revised target price of Rs 1,104 factoring higher value from RJIO.

RJIO: Profitable debut; cost competitiveness positive surprise
RJIO debuted with Ebit breakeven with healthy ARPU of Rs 156 and 139m subscribers. It has recognised bulk of the revenue from Summer Surprise Scheme (Apr-July) in July’18, propping up ARPUs. RJIO’s operating cost surprised positively with unit network cost 49% lower than Idea’s in Q1FY18 due to lower tower rentals and significantly lower subscriber acquisition cost riding its digital onboarding. We now estimate Ebitda breakeven in FY18 and have revised up FY19e Ebitda 144% to Rs 210 bn, assuming 9% higher subscribers, 5% higher ARPU and 43% Ebitda margin.

GRM disappoints; robust petchem; new projects to revive earnings
GRM disappointed at 412/bbl. Petchem was robust amidst 15% q-o-q higher volumes and firm spreads in integrated polyester chain and PVC. Grandiose Rs 20 bn core capex has begun yielding results and will significantly uplift earnings, notably: (i) ethane imports (Rs 1.5 bn, est. RoCE: 18%): cracking streamlined; (ii) PX expansion (2.2 MMT, all trains started) and MEG plant (750KT) will strengthen integration in the polyester chain; and (iii) ROGC started during the quarter. Petcoke gasification (Rs 5 bn) is set to be commissioned in FY18.

Outlook and valuations: Core gains; maintain ‘BUY’

With mega core projects commissioning shortly, we expect RIL’s FCF to turn-around, RoE to increase and profit to double in 5 years. Successful execution by RJIO bolsters our confidence in the mega venture. We have raised our FY19EPS by 20% as we have upgraded our RJIO estimates. Stock trades at 1.4x FY19E P/BV. We reiterate ‘BUY/SO’ with revised target price of Rs 1,104; as we raise RJIO value by Rs 40/share.

RJIO: Strong debut, breakeven at Ebitda and Ebit level
Reliance Jio (RJIO) reported strong results with breakeven at Ebitda and Ebit level in the first quarter of commercial operations. It reported revenue of Rs 61.5 bn (implyingRs 156.4 ARPU) with 23.5% Ebitda margin. The customer engagement statics are impressive and should enable steady price hike. Higher than expected ARPU was due to booking bulk of the paid revenue at the end of the usage life while lower cost was attributed to (i) better tower rent negotiations and significant portion of own towers, (ii) digital approach for customer engagement and processes, and (iii) part of the operating cost being capitalised (since not all the antennas are radiating on all the spectrum bands and some of the employees are working on projects which are not launched). We believe that with meaningful cost advantage, RJIO will continue to remain aggressive in pricing focusing on market share gains.

Strong consumer engagement
RJIO’s usage metrics indicate significantly higher consumer engagement with 9.62 GB per month average data usage (Bharti/Idea 2.6/2.2 GB in Q1FY18) and 626 minutes average voice usage (Bharti/Idea 507/441 minutes in Q1FY18). Also RJIO continues to add significant subscriber base despite starting to charge and increasing rate, albeit slowly, whereas other operators are losing subscribers. In first 2 months of Q2FY18,RJIO added 11.2 mn subscribers versus 0.4 mn addition for Bharti and loss of 3.8 mn and 5.2 mn subscribers for Vodafone and Idea, respectively. Importantly, churn for the company is lower than 1% (Bharti/Idea 3.8/6.7% in Q1FY18). RJIO claims to have 85% market share in the LTE smartphone base in the country. The company is gearing up for the JioPhone shipments and it is seeing strong demand.

ARPU impacted by one–off
The company booked significant part of the earlier offer period revenue and part of prime revenue during Q2FY18 leading to higher than anticipated ARPU; e.g. if a consumer had recharged with an amount of Rs 309 (with 3 month free usage for 1 month purchase) at the beginning of Q1FY18, then the full Rs 309 was booked in the last month as the 3 months were free. The company also booked part of Prime revenue leading to higher than expected ARPU. However, the company is likely to reduce discount going forward which would support the smartphone ARPU. Launch of feature phone will dilute ARPU as it is offered at meaningful discount to the smartphone ARPU.

This article was first uploaded on October twenty-three, twenty seventeen, at fifty-six minutes past four in the morning.