IUC cut a boost for Reliance Industries

Positive for telecom biz, core business already doing well

The Telecom Regulatory Authority’s (Trai’s) decision to cut the interconnection usage charge (IUC) by 57 per cent from October 1 and to nil from the 2020 boosted the Street sentiment towards Reliance Industries (RIL). The RIL stock hit a new high of Rs 872.10, following expectations of better prospects of its telecom venture, Jio.
 
Although analysts had expected IUC charges to be revised from the current 14 paise to seven paise per minute, Trai reduced it to six paise. This should bring down costs for Jio. Motilal Oswal Securities estimates IUC cost savings of Rs 6,000 crore to Rs 4,500 crore and that its IUC per subscriber should reduce to Rs 40, from Rs 85. Analysts at Kotak Institutional Equities say for Jio this would mean an annualised saving of $550-600 million.
 
Analysts at CLSA see the cut in IUC boosting RIL’s earnings by eight per cent over FY18-20. They have revised the target price for its share from Rs 990 to Rs 1,050. However, it is not known how RIL will utilise the savings — pass on to customers through lower rates, retain gains or both. In either case, it should be positive.
 
All eyes now are on the launch of Jio’s 4G smartphones, for which RIL had received good initial booking. Analysts expect the strong momentum to continue. CLSA says this could be a positive surprise for the Street, given their expectation that 100 million Jio phones could add over $1.5 billion (about Rs 9600 crore) to Ebitda (earnings before interest, tax, depreciation and amortisation) of Reliance.
 

Meanwhile, RIL’s core businesses of refining and petrochemicals are seeing strong gains. Capacity expansions are driving growth and profitability is improving. Asia’s complex gross refining margin (GRM) had seen a significant rise to $11 a barrel in September, with US capacity shutting due to Hurricane Harvey. While the benchmark GRM is off the highs with capacities back on track, it will still boost RIL’s September quarter performance.
 
Kotak Securities’ recent data suggest the benchmark GRMs are up 35.7 per cent sequentially in the second quarter of FY18 to $7.4 a barrel. Refining margins are to remain firm, as global refinery capacity additions in 2017 are lagging demand growth. Nomura estimates additions of a million barrels per day (bpd) or less in refining capacities against demand growth of 1.2 million bpd during 2017.
 
All this also means the money invested in new capacities will start adding to RIL’s return and cash flow. Analysts at Deutsche Bank estimate the contribution from expansions and robust downstream margins to drive RIL’s Ebitda (ex-telecom) growth by 39 per cent over FY17-19. The improvement in telecom segment prospects will prop up the overall prospects.