Tariff change should lead to 58% rise over Q2FY20 annualised Ebitda; Jio’s equity valuation up to Rs 500; TP raised to Rs 1,836
Further to its price-hike announcement, RJio – along with Bharti and VIL – has rolled out new tariff plans with effective hike of ~27%, which should result in 58% increase over annualised Q2FY20 Ebitda. While the absolute discount between RJio and Bharti/VIL’s price plans are constant at Rs 40-50 for most of the popular quarterly bundled plans, the discount of RJio’s plan over Bharti/VIL’s plan has reduced to 8% from 11-13% in previous months. We raise the equity valuation of RJio from Rs 280/share toRs 500/share as a result of the tariff hike. We raise the target price of RIL fromRs 1,630/share to
Effective price hike of ~27%; 58% rise over Q2FY20 annualised EBITDA While Minimum Recharge Price plans were hiked by 32% (now beginning atRs 129), the popular monthly plans witnessed a price hike of ~25-30%. High ARPU prepaid plans have seen ~27% price hike, which would result in ARPU increasing byRs 38 fromRs 142 toRs 180. While no rates have been disclosed for low ARPU Jio feature phone subscribers, we assume ~30% price hikes for these subscribers too. Low ARPU Jio phone subscribers would probably see a hike of
Rs 25 in ARPUs fromRs 84 toRs 109.
Discount over Bharti/VIL reduces; revenue/Ebitda to rise by ~27%/58%
The price differential between RJio and Bharti/VIL’s price plans is constant at ~Rs 40-50 for most of the popular quarterly bundled plans; however, we see the discount of RJio’s plan over Bharti/VIL reducing to ~8% from ~11-13% witnessed in the previous months. The hike in ARPUs for Jio should result in ~Rs 134/119 bn incremental revenue/ Ebitda, which is ~25%/58% rise over the previous revenue/Ebitda (Q2FY20 annualised) with 89% incremental Ebitda. Subsequently, we have revised our revenue/Ebitda estimates upwards by 6.7%/13.8% toRs 553/255 bn for FY20e and by 24%/44% toRs 829/463 bn for FY21E. This should result in incremental Ebitda ofRs 20/share for RJio with an implied EV/Ebitda multiple of 11x, taking the target price toRs 500 (earlierRs 280). RJio’s net debt ofRs 2,042 bn does not take into account the recent capital reclassification, which would shiftRs 1,080 bn debt to RIL, but may not alter the overall net debt and TP of the company. However, RJio’s net debt includes fiber debt ofRs 460 bn, which is part of the InvIT but is yet not sold to an external investor.
Further, RJio’s free cash flow (FCF) is expected to rise incrementally to Rs 117 bn, which could in turn see its FCF rise toRs 143 bn. This is on the back ofRs 100 bn interest cost, which should be contained due to the recent capital reorganisation announcements and reducing capex intensity in the market as indicated by RJio and other telcos. The incremental cash flow could be used to reduce FY21E net debt to Ebitda from the current 3x.
Valuation & recommendation
Refining margins have been trending low due to excess global glut amidst tepid demand, and therefore, the tariff hike has come at the right moment for the company. RIL is trading at 8.6x FY21 EV/Ebitda and 13.2x FY21 P/E. We value the core segments at 8.5x FY21 and addRs 413/share for retail. Incorporating the rise in equity valuation of Jio fromRs 280/share toRs 500/share, we raise the target price of RIL fromRs 1,630/share toRs 1,836/share (adjusting for other changes). Reiterate Buy on the stock.