Facebook investment paves way for RIL to become debt-free by March 2021

According to estimates by Jefferies, the deal implies a pre-money equity valuation of Rs 4,362 billion ($57 billion) for Jio Platforms Limited (JPL).

Even though Facebook may have picked 9.99 per cent stake in Mukesh Ambani-controlled Reliance Jio (RJio), analysts believe Bharti Airtel remains a ‘direct way’ to play the changing fortunes of the Indian telecom sector. That said, the Facebook-Reliance deal lends confidence in the Indian telecom sector and paves the way for RIL to become a net debt-free company by 2021, they say.

On Wednesday, California-based Facebook and Reliance Industries (RIL)-owned Jio Platforms Limited (JPL) announced that the former would invest Rs 43,547 crore ($5.7 billion) in JPL to expand its presence in India. This will be Facebook's biggest minority shareholding ever and the largest foreign direct investment for minority investment in India. The markets took note of the development and RIL surged nearly 7 per cent in morning deals to Rs 1,326 levels on the BSE.

Analysts at Credit Suisse say the deal follows the restructuring announced by RIL in October 2019, when the company transferred Rs 1,080 billion of debt from RJio to a standalone entity, leaving liabilities of around Rs 640 billion (spectrum liabilities and capex creditors) at Jio.

“The deal will aid in achieving net debt free by March 2021. As of December 31, 2019, the net debt for the group stood at Rs 1,531 billion and with Facebook's investment, this should put RIL on course to be net debt free by March 2021,” analysts at Credit Suisse said in a note.

Those at IDBI Capital, too, share a similar view. RIL's total net debt, according to Sudeep Anand, an analyst tracking the sector at IDBI Capital, would also come down by 28.5 per cent to Rs 1-lakh crore, which was at Rs 1.53-lakh crore at the end of Q3FY20.

“This is big leap towards its intention to be net-debt free by the end of financial year. We remain optimistic for its core business like refinery and petrochem where we expect revival from the second half of FY21 (H2FY21). Maintain strong 'BUY' on the stock,” he said.

According to estimates by Jefferies, the deal implies a pre-money equity valuation of Rs 4,362 billion ($57 billion) for JPL. The company also has Rs 410 billion of net debt on JPL's balance sheet, implying an enterprise value (EV) of Rs 4,772 billion ($63 billion).

“This is 21x its Q3FY20 annualised EBITDA of Rs 223 billion, and assuming 10-12x EV/EBITDA multiple, the valuation implies a forward EBITDA of Rs 398 – Rs 477 billion. Hence, valuations suggest that Facebook expects Jio's EBITDA to double from current levels. The transaction also sets a benchmark valuation for any listing in future for JPL in our view,” wrote Akshat Agarwal and Pratik Chaudhuri, analysts tracking the company at Jefferies in a note.

Meanwhile, according to reports, RJio's subscriber base has increased to 388 million now, implying net additions of 18 million subscribers in the fourth quarter of financial year 2020 (Q4FY20). The new additions, analysts say, have been impacted due to reduced Mobile Number Portability (MNP) activity during the nation-wide lockdown in the backdrop of coronavirus (Covid-19) pandemic.

Advantage Bharti

That said, Jefferies believes this investment in RJio by Facebook has lent confidence in the road ahead for the Indian telecom sector, and Bharti Airtel is a 'direct way' to play this turnaround.

The current tariff discipline and expected decline in spectrum pricing are long-term positives for the sector, they believe, given the high entry barriers that will sustain the current pseudo-duopoly market structure.

"While the stock has traded at 7x EV/EBITDA over the past 10 years, we believe given these long term positives, a re-rating is warranted. We maintain buy and price target of Rs585/share based on SOTP valuation implying 8.9x EV/EBITDA, 20 per cent premium to its average valuations," Agarwal and Chaudhuri wrote.