A year after Jio launch, RIL sees more upgrades

Underlying fundamentals gaining strength; Jio phones may add over $1.5 bn to Ebitda

Reliance Industries (RIL) is upbeat about its telecom venture Reliance Jio at the end of its first year of launch. RIL’s investments of over Rs 1,50,000 crore in telecom, seen as a drag on its return ratios earlier, could start bearing fruit earlier than expected, given the response to its services.

Jio has set a record by crossing the 130-million customer mark. Also, rising expectation of a cut in interconnect usage charge (IUC; paid by one operator to another for call termination) and the launch of Jio phones can accrue big gains for RIL.

A cut in IUC would accelerate operational break-even and allow Jio to contribute to RIL’s return on equity, already getting a boost from improvement in core businesses of refining and petrochemicals.

Telecom regulator Trai is looking to reduce IUC to Rs 0.07 or nil (currently Rs 0.14), and push for a transition to the ‘bill and keep’ model. This may add up to 13-14 per cent to RIL’s FY19-20 consolidated earnings, estimates CLSA, and boost fair value equal to eight per cent of the current stock price. 

With about six million orders received for Jio phones, CLSA expects this momentum to continue. It also feels this could be a positive surprise for the Street, given the brokerage’s expectation that 100 million Jio phones may add over $1.5 billion to RIL’s Ebitda (earnings before interest, tax, depreciation and amortisation).

Positive news flow has enabled the RIL stock gain momentum since early 2017, after underperforming the markets for nearly nine years. Also, the gross refining margins (GRMs) are reaching cycle highs, chemical margins are recovering to mid-cycle levels and clarity is emerging on telecom. Leading brokerages, including Deutsche Bank, Morgan Stanley and CLSA, have upgraded the stock in the past few days.

The benchmark Singapore GRMs are on the rise in the September quarter after remaining flat in the June quarter ($6.4 a barrel). The disruption caused by the Hurricane Harvey in the US has boosted the firm’s GRMs. While the September quarter averaged at $7.7 a barrel until August 24, GRMs surged to $10.5-11 a barrel on September 1. In the June quarter, RIL reported robust GRMs of $11.9 per barrel.

While the refining segment contributes about 50 per cent to RIL’s operating profit (Ebitda), petrochemicals account for almost a third. With a rise in margins, gains for this segment are on the anvil. The chemical margins for key products are up 8-25 per cent sequentially. The midstream polyester margins are expected to rise to 25 per cent in 2017-18, after increasing by 30 per cent year-to-date, says Morgan Stanley. 

Analysts at Deutsche Bank say, “Contribution from expansion and robust downstream margins should drive RIL’s Ebitda (ex-telecom) growth of 39 per cent over FY17-19.” This is far higher than the single-digit compounded annual growth rate seen in the past nine years.