Reliance Jio to start charging tariffs, Jefferies puts ‘Hold’ rating on Reliance Industries

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Published: February 27, 2017 2:28:22 AM

Jio announced in its press conference days ago that it plans to start charging customers from April 1st.

Reliance Jio, Prime membership, Everyday More Value, Jio charging tariffs, P&L recognition, capex plans, Target Investment Thesis, Jio NewsJio announced in its press conference days ago that it plans to start charging customers from April 1st.

Jio announced plans to start charging tariffs from 1st April. While it will continue with discounting through ‘Prime membership’ and ‘Everyday More Value’ schemes, we believe this is a significant development as it will likely lead to P&L recognition of Jio in FY18 and also provide much better visibility on its true potential, which has been difficult to gauge under the current free offering in our view.

Jio to start charging tariffs from 1st April: Jio announced in its press conference days ago that it plans to start charging customers from April 1st. This is significant in our view, as it will likely lead to P&L recognition of Jio in FY18 and provide much better visibility on true potential of Jio, despite continuation of discounts in the form of: 1) Jio prime membership which will allow customers enrolled until March 31st to continue using unlimited data (up to daily cap of 1GB for best speed) for a monthly fee of R303 vs. regular tariff of ~ R2,500 and 2) ‘Everyday More Value’ scheme which will provide 20% more data than comparable plans of competitors. We note that prime membership in particular will target the 15% subscribers who currently have an ARPU above R250 but account for over 40% of industry revenues.

Subscriber addition by others makes it tough to gauge true momentum so far: Management indicated a subscriber base of 100 mn within 170 days of its launch in early September. However, we note that subscriber addition of the rest of the industry as reported by COAI has continued at the usual pace despite such a significant disruption by Jio. This makes it difficult to gauge the true underlying momentum in Jio in our view, especially given its current free offering.

Management reiterates near-term capex plans: Management also reiterated its plans to increase network coverage of Jio to 99% of population and double data capacity by 2017 end. This will ensure continued rise in capex to over R2 trn ($30 bn) by FY18 end vs. R 1.7 trn ($25 bn) at the end of Q3, in line with guidance.

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Maintain Hold: We remain cautious on Reliance as we believe high underlying liability on balance sheet leaves little room for equity upside even assuming full upside from downstream projects and reasonable value for Jio.
Valuation/Risks: Our price target of R1,060 for Reliance is based on a SOTP of the different businesses and implies 12x FY19e P/E. Key risks: (i) higher/lower downstream profits, (ii) positive/negative surprise on Jio performance post launch, (iii) corporate action.

Scenarios
Target Investment Thesis
i. Ramp-up in downstream projects over FY17/FY18 with full impact in FY19.
ii. GRM of $10-11/bbl in FY17-19E.
iii. Jio paid subscribers of 100 million by FY20 end with R315 ARPU.
iv. Standalone EPS of R105/110/124 and consol EPS of 102/75/93 over FY17- 19e.
v. SOTP based fair value of R1,060.

Upside scenario
i. Better than expected upside from downstream projects.
ii. GRM of $11-12 per bbl in FY17-19e and higher petchem margins. o Jio paid subscribers of 150 mn by FY20 end with ARPU of R315.
iii. Standalone EPS of R110/119/135 and consol EPS of 108/95/110 over FY17-19e.
iv. SOTP based fair value of R1,300

Downside scenario
i. Lower than expected upside from downstream projects.
ii. GRM of $9-10 per bbl in FY17-19E and lower petchem margins.
iii. Slower ramp up of Jio and higher burn.
iv. Standalone EPS of R95/90/105 and consol EPS of 75/60/70 over FY17-19e.

Company description: Reliance Industries, one of the largest private companies in India, is vertically integrated across the oil & gas supply chain with activities spanning E&P , refining and marketing of petroleum products and manufacture of petrochemicals and textiles. Its Jamnagar refining complex is one of the largest single location refineries in the world. The company is also present in retail and telecom businesses through its subsidiaries.

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