Reliance’s summer surprise for investors

The stock closes at 9-year high; outlook for RIL’s telecom business has improved with Jio Prime customer base ahead of estimates

The Street has welcomed the strong customer response to Reliance Jio’s offer and the company’s plan to extend its Prime offer by 15 days. As analysts were anticipating Jio to retain 50-60 million customers after the end of its free period, the Prime membership number of 72 million customers also surprised the Street. Reliance Industries Ltd (RIL), whose subsidiary is Jio, ended at ~1,371.20 on BSE.

This extension will help the company increase its telecom subscriber base from 72 million to its target of 100 million, say analysts. Further, subscribers to the ~149 plan have got additional time to migrate to the upgraded ~303 plan, which should lead to a higher base of Prime subscribers. The extended period, according to analysts at CLSA, allows for gradual transiting from free to paid services and further cement high-data usage habits.

Jio, they add, could have well over 100 million paid subscribers by March 2018, which could drive an upgrade to the earnings estimate for FY19 and rerate the stock (RIL) significantly.

There are, however, some concerns. The first is delay in monetisation on the back of significant upfront investments, given the three more months of complimentary service, while the other is the indication that the ‘Summer Surprise’ offer is the first of many surprises for RJio’s Prime subscribers.

Analysts at Jefferies are cautious and have a hold rating on the company, though they have increased estimates of a steady market share for RJio from 25 per cent to 30 per cent. The free offer is expected to hit RJio’s FY18 earnings estimates by six-seven per cent and requires an increase in the quarterly subscriber base by five million to negate the earnings impact on an annualised basis, say analysts at Morgan Stanley.

Analysts at ICICI Securities estimate a revenue market share of 10 per cent for FY18 but the break-even at earnings before interest and income tax (EBIT) to come by FY21, given large depreciation costs of ~10,000 crore every year.

As the Jio subscription offer remains in focus, the company is expected to unfold further plans/services such as internet TV and is likely to use fibre-to-home infrastructure for remote villages too. With improved confidence and revenue visibility for the telecom business, concerns on the company’s investments of more than ~1,50,000 crore in the telecom venture are also reducing.

RIL will benefit from its core refining and petrochemicals businesses. Its investments over the past few years in expanding these verticals will yield results and drive earnings also. The process has begun with the commissioning of the first phase (a 50 per cent capacity increase) of its 2.2-million-tonne per annum Paraxylene (PX) expansion project at the Jamnagar petrochemicals complex at an investment of more than $3 billion. While this commissioning is a key milestone, it is to be followed by the refinery off-gas cracker with 3.3 million tonnes per annum capacity, which is lined up for commissioning soon. Subsequently, by the middle of 2017, a pet-coke regasification project is expected to come on stream. Thus, the second half of 2017-18 will see benefits accruing after these projects stabilise, and the December quarter is expected to be stronger for RIL.