Brokerages bullish on RIL stock after Jio hikes tariff by 21%

Brokerages have given a thumbs-up to the 21 per cent across-the-board tariff hike done by Reliance Jio (RJio) in its prepaid plans with Jefferies raising the 12-month price target to Rs 2,950 from Rs 2,880 earlier. In the best-case scenario, the global research and brokerage house sees the RIL stock at Rs 3,400 levels post the tariff hike in 12 months from now.

Reliance Jio, following its peers Bharti Airtel and Vodafone Idea (Vi), hiked its prepaid tariff plans by around 20 per cent across the board (including around 21 per cent in base JioPhone level plans) over the weekend. The new tariff comes into effect starting December 1. Reacting to the development, RIL surged nearly 4 per cent to Rs 2,497.90 on the BSE in Monday’s intra-day trade.

“Reliance Jio's tariff hikes have brought its discount back to 13-20 per cent versus Bharti Airtel in the prepaid smartphone segment. This should keep Jio's subscriber momentum intact. Post the tariff changes, on an absolute spend basis, 2G feature-phone users, low-end JioPhone users and high-end JioPhone users will have to spend 2.6x-4.4x more over a 24-month period to upgrade to JioPhone Next. We also raise Jio's EV by 8 per cent to $96 billion,” wrote analysts at Jefferies in a recent note.

As a result, Jefferies has raised their average revenue per user (ARPU) estimates by 6 - 7 per cent and expects Jio to have ARPU of Rs 172 by fiscal 2023-24 (FY24). That apart, they have also raised FY22-24 revenue/EBITDA/profit estimates by 5-23 per cent on the back of higher ARPU and now expects Jio to deliver 18-31 per cent CAGR in revenues and profits.

Those at Kotak Institutional Equities, too, have upgraded RIL stock to ‘BUY’ from their ‘ADD’ rating earlier citing favourable reward-risk balance post the recent correction and relative sharp underperformance versus peers in telecom and retail business. As regards the telecom vertical, Tarun Lakhotia and Hemang Khanna of Kotak Institutional Equities believe that the stage is set for further increases in tariffs in the coming years given the set industry structure post the recent policy decision to defer AGR/spectrum liabilities by four years.

"We expect RIL’s EBITDA to grow by a robust 26 per cent CAGR over the next two years driven by strength in refining and polyester margins, rise in telecom tariffs, a robust growth in retail and an increase in E&P contribution. We also expect the stock to rerate led by scaling up of new commerce and new energy forays," they wrote in a recent report.

RJio, cautioned analysts at Motilal Oswal Financial Services, has a risk of downtrading to lower price plans as consumers can save 20-25 per cent for even a 1GB per day plan. This is unlike Bharti Airtel and Vodafone Idea, which have a limited risk of downtrading due to the design of the price plans. Despite this, they remain bullish on the stock and have maintained a 'buy' rating with a price target of Rs 2,900.

This should derive 27 per cent EBITDA upside on 65 per cent incremental EBITDA margin thus building 26 per cent EBITDA CAGR over FY21-24E. But the tapering expectation of aggressive subscriber adds (due to Jiophone phone launch) may partly offset the gain, the brokerage firm said.

"We expect revenue CAGR of 10 per cent and EBITDA growth of 16 per cent over FY21–24E on the back of an 8 per cent subscriber CAGR over FY21–24E. This would increase our EBITDA estimates by 27 per cent implying FY23/24E EBITDA of Rs 550 billion / Rs 616 billion, respectively and an EBITDA CAGR of 26 per cent," they said in a stock update note.