Stock analysis: RIL hopes to tether back telco clients, Jio break-even seen

Analysts believe it may not be difficult to retain 50% of subscribers under Prime membership plan

With clarity emerging on commercial launch of Jio's telecom services, the Street pushed up Reliance Industries Limited (RIL)'s stock by almost 11 per cent on Tuesday. Part of the surge could be down to most market participants factoring in a continuation of freebies or expecting much lower rates than those announced on Tuesday. Moreover, details suggest the rates offered are attractive and if Jio is able to hold back most of its subscribers, it could achieve break-even earlier than expected. As a result, analysts have raised their valuation for RIL's telecom business. Jio is a relatively new telecom player.

In an announcement on Tuesday, RIL’s chairman said Jio customers will start paying for services from April 1. Jio's customers can get unlimited free data (up to 1 GB a day) and free voice services by paying Rs 303 per month till March 2018 and a one-time enrolment fee of Rs 99 (for Prime membership) in March 2017. Jio's non-Prime members can choose any plan between Rs 149 and Rs 4,999 per month, which were announced earlier. However, subscribers can also choose the priciest plans of Jio's rivals and get 20 per cent more data. While the pricing appears attractive for Jio's subscribers, it is not too low. Thus, analysts can better foresee Jio break-even.

“Cash break-even for Jio will require a base of more than 100 million subscribers at an Average Revenue Per User (Arpu) of Rs 300 a month to adequately cover significant operating costs, given unlimited voice and data, interest costs, and recurring maintenance spending. Jio can break-even at operating-profit level in FY18 if it is able to retain 50 per cent of subscribers under Prime plan," says Tarun Lakhotia of Kotak Institutional Equities. 

Aliasgar Shakir, analyst at Motilal Oswal Securities, also believes break-even could be earlier than expected.

Most analysts believe it may not be difficult to retain 50 per cent of subscribers under the Prime plan. 

Despite surge in RIL's share, most analysts believe the stock continues to assign negative value to the telecom business. While they see potential for valuations to increase, they say investors must watch out for steps taken by other telecom operators to retain high-end customers, which could have a bearing on the new subscriber additions for Jio. Likely consolidation of the two telecom players will mean reduced competition for Jio. 

"A consolidation in the telecom industry could improve RIL's return on capital employed, after five years of decline. The competitive landscape would likely improve after the consolidation and aid valuations of RIL's telecom business," said analysts at Morgan Stanley. 

While start of commercial operations of telecom business is a positive, RIL's $18.5 billion worth of projects in core petrochemicals business such as petroleum-coke gasification, off-gas cracker, polyester expansion, are delayed again by six months. Gasification will be complete by June and will fully start by January 2018. The off-gas cracker project will start from September, and ethane sourcing is on track. 

Overall, the full benefits of these expansions will reflect from FY19. As the company reaps the benefits of these investments, expect free cash flow and return ratios to improve going forward. While the Street will be keeping an eye on the progress in telecom and core businesses, Tuesday's stock surge is closer to the one-year target price of most analysts. So, stock rise in near term could be limited.