Is Reliance Jio leading to a market re-rating for RIL?

The RIL price movement of 11% in a single day on 22nd February definitely took the markets by storm. The last time that the RIL stock showed this kind of an appreciation in price was in mid-May 2009 in the aftermath of the Congress led government being voted back to power by a near majority. That fact that this has happened after a gap of almost 8 years, shows that is surely special. There are 5 key questions to be answered here…

  1. Is this a one-off rally in Reliance Industries or is the rally likely to sustain?
  2. Is this a sign of investors re-rating the RIL stock decisively?
  3. Is Reliance Jio emerging as a key disrupter in the telecom market in India?
  4. Can Jio disrupt the telecom market and also be profitable at the same time?
  5. Will RIL be able to justify channelling profits from refining and petchem into telecom?

Many of these questions will get answered over the next couple years. We will have to wait and see customer accretion at Reliance Jio once the free offer period is over. We will also have to see if Jio’s big on data actually works out for its profitability in the quarters to come. But the indications are there that RIL may be on the right track. Here are 10 such indicators!

10 Indicators that Jio could lead to a re-rating for RIL…

  1. Reliance Jio crossed the 100 million customers mark in less than 6 months since its launch. This is the fastest growth in customer accretion ever achieved. In fact, this translates into 7 customer additions per second and is faster than what Facebook and WhatsApp achieved during the peak growth periods.
  2. By end of 2017, Reliance Jio hopes to cover nearly 99% of the Indian population. That is when the network benefits and the benefits of the convergence of infrastructure, content and price will actually be felt.
  1. Reliance Jio is betting on the data market exploding in a big way. Currently, the Indian data market has been constricted due to pricing that is almost cartelized and not conducive to growth in an economy like with India with a per capita GDP of just $1700/-.
  1. Once free offer period from Reliance Jio ends on March 31st this year, Jio will offer a 30GB package at Rs.303 per month. The pricing will be less than 1/10th the average data prices offered by existing mobile operators and the pricing of Rs.303/- month will allow Jio to lock in customers for its data service for the long term.
  1. This move will also make sense for the company in financial terms. Under the proposed scheme, Reliance Jio will have an assured ARPU of Rs.303 per month on data alone. Of course, RIL has promised to keep voice calls free for life and hence this all that Jio will earn. But this is substantially higher than the data ARPU earned by Bharti Airtel (which is around Rs.190) and the ARPU earned by Vodafone (which is currently less than 160).
  1. This will mean either of the two outcomes. Firstly, it is possible that to remain competitive and to retain customers, Vodafone, Bharti Airtel and Idea may choose to drastically drop voice charges. That will hit these companies’ ARPUs and also the profitability in the short to medium term. Secondly, there may be a huge migration towards the Jio service purely for its data service.
  1. That brings us to the next big question; what happens to the proposed break-even for Reliance Jio? For the time being, Jio is likely to stick to its target of turning EBITDA positive by mid-late 2018. That will be a big boost by global telecom standards. Further profits will get a boost from the “Winner takes it all” principle that will begin to work in favour of Reliance Jio.
  1. The core business of RIL consisting of refining and petrochemicals has been showing phenomenal traction. Over the last 7 quarters, RIL has been consistently outperforming the street estimates. This has not been factored into the market price as markets were unsure of the wisdom of transferring oil and petrochemicals profits into telecom. The recent visibility should give hope and optimism for shareholders and investors.
  1. The RIL group has, till date, infused nearly $20 billion into Reliance Jio and plans to infuse another $5 billion. This has money has come from superior performance on the refining and petchem front. The Gross Refining Margins (GRM) of RIL at $10-11/barrel has enjoyed a premium of $4/barrel over the Singapore benchmark. Petchem margins at 15% are also among the best among industry peers!
  1. For the RIL group overall, this Jio experience may be the beginning of a new rating experience as far as its stock is concerned. For many years, RIL has always commanded market valuations due to its predominant focus on commodities. This applies to the petchem, extraction and the refining business. With its recent foray into retail and telecom, this may help RIL metamorphose more into a consumer-facing company. That will also imply more prospects for cross selling, more opportunities to improve revenue per customer and greater likelihood of a better earnings discounting.

The 11% price appreciation that RIL stock saw on Feb 22nd may be indicative of a bigger shift happening in the way the market approaches and values the RIL stock. The performance in the next few quarters will spell out the actual story!

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