2018 holds better prospects for RIL

Subscriber additions, expansions have translated into earnings upgrades

The Reliance Industries (RIL) stock has been one of the biggest gainers in 2017, adding 68 per cent to shareholder wealth, led by positive surprises in the telecom business (Reliance Jio) and strong performance in the core refining and petrochemicals businesses.

A recent trigger has been the acquisition of fibre, tower and spectrum assets of Reliance Communications (RCom) for an estimated Rs 250 billion. Though the deal will raise RIL’s debt, it will get substantial benefits in terms of lower costs, expansion of 4G coverage and higher synergies. While RIL will save about Rs 15-16 billion in annual rental cost for towers, there are synergies on existing infrastructure assets currently leased from RCom.

The other trigger is strong operational performance of Jio. Jio’s subscriber additions in October, for example, at 7.3 million are double the increase clocked by Bharti Airtel, and Jio’s market share currently is about 13 per cent. New plans introduced in October also increased tariffs by 15 per cent for its most popular plans of Rs 399/454 for 84 days’ validity.

Analysts at Sharekhan said strong subscriber addition and improvement in average revenue per user (ARPU) would improve Jio’s profitability. Analysts said Jio’s subscriber market share would double to 24 per cent by FY20, while ARPU should rise to Rs 195 levels. With Jio’s net profit estimated at Rs 111 billion by FY20, it should account for a fifth of RIL’s consolidated profit.

In a late-November report, analysts at Goldman Sachs said petchem (from refining) would be the largest contributor to RIL’s earnings by FY19, with incremental operating profit of $3 billion in the next three years driven by higher volumes, favourable product exposure and improving cost structure. They pegged chemicals business’ operating profit at $5.5 billion, compared with $2.5 billion in FY17. Better product integration and flexibility in feedstock will also enable the business to lower the impact of cyclicality.

The refining business should also continue to outperform the benchmark Singapore gross refining margins (GRMs), as the uplift from the petcoke gasification projects can offset some moderation in cracks and reversal of crude sourcing benefits. The petcoke project is expected to provide a boost of $1.5 per barrel to RIL’s GRMs, which have ruled over Singapore margins by $3-4 a barrel in the past two years.

Overall, the expected improvement in RJio’s financials is the single biggest reason for analysts to upgrade their earnings estimate of RIL. New projects in core business and higher capacity utilisation add to the overall improvement. After 19 per cent growth in FY17, analysts at Nomura said RIL’s earnings would grow between 21 and 38 per cent in the FY17-20 period.

As most of RIL’s capital expenditure is over and have started contributing to its top line, the company should see substantial increase in profits, which it can distribute to shareholders and/or to lower debt, at least till it draws up the next mega investment plans.